SIGN

• Ref.: PID2021-126300NB-I00
• Principal Investigator: Luca del Viva
• Research group: GREF
• Funding body: Generación de Conocimiento 2021 Ministerio Ciencia e Innovación
• Funding: 33.880,00 €
• Duration: 48 months

Summary: 

Many trading strategies that have been used by the asset management industry in general suffers from rare but severe crashes. As an example, between April 2020 and November 2020, as consequence of the COVID pandemic shock, the momentum strategy lost roughly 38% of its portfolio value. More severe losses were reported during the 2008-2009 financial crisis, where momentum lost roughly 80% in just 2 months (March 2009 to April 2009). These figures emphasize the importance of developing wealth management strategies that are less affected by crashes and that incorporate more accurate information about future returns. Motivated by the need to improve current trading strategies, the research team recently developed and tested a new methodology that can be applied to existing trading strategies and might help in improving the return performance as well as reducing the probability of negative returns of the available trading strategies.

The initial empirical evidence showed promising results on the possibility to equip the standard methodologies used in wealth management with a sign indicator that will allows to avoid crashes in the strategy. This project will extend the study to a set of 452 equity return anomalies and improve them in order to reduce the probability of crashes in the applied strategy and increase the stability of the long-term returns in a sample of European and Asian firms. The directional signal strategy could be applied to the set of the other securities available in the market like fixed income and options.