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An exercise in

Trading by Rotation

Created and maintained by Dimitrios D. Thomakos, © 2008

 

 

Last updated: 03/06/2008 每 Weeks running: 9

 

Trading updates available after Wed each week

Figure on right updated on: 03/06/2008 每 cumulative value of 1 Euro over past 325 weeks, rolling window, rotation strategy

 

Visit two more simulated Trading-by-Rotation webpages: Predictions and TbR for Oil and the Euro and TbR with S&P500 and VIX

 

Click to link on this webpage:

Summary of Trading Recommendations,

Introduction, Data, Methodology, Simulated Trading and Performance

 

*   Latest news

03/06/2008 每 The Greek market has fallen dramatically last week, over -7% for the FTSE-20 that the three stocks of the strategy belong to. All three stocks had negative returns in excess of -5% and the cumulative return of the strategy is at -25% - still, the historical performance of the strategy is consistently better than either any of the three stocks or the FTSE-20 index.

02/28/2008 每 Recovery! The last recommendation for ETE was not optimal but both ETE and EFG went into positive territory. The cumulative value of 1 Euro over the past 8 weeks is now 0.8290, still outperforming the FTSE-20 index.

02/20/2008 每 Oops!!! A bummer! The last recommendation was not good, at all...The recommendation was for ETE that actually dropped over -6% compared to past week. This was a hard blow, especianlly since the Greek market has been falling since the beginning of the project. Nevertheless, we continue. The current recommendation is still for ETE. Lets see what happens next week...

02/13/2008 每 A good rotation! The latest recommendation for PEI came out correct. It only provided a negligible gain of 0.46% but the direction was accurately forecasted: both EFG and ETE had negative returns over the past week.

02/07/2008 每 Another bad week for the Greek market...All three stocks had negative returns but the strategy survived with minimum damage. The recommendation for EFG from past week was second best as it had realized return -1.78% compared to -1.22% from ETE but the effect on the cumulative worth is small. The good thing is that the strategy did avoid the PEI stock that dropped by -3.66%!

01/30/2008 每 All three stocks bounced back to positive territory compared to past week! Our directional forecast was for ETE, realized return 8,66%, but PEI was slightly higher, realized return 9.81%. The total cumulative return of the strategy is now -14.16% which compares to -22.02% for EFG, -18.36% for PEI and -12.56% for ETE.  The FTSE-20 index had a cumulative return over the same period of -15.60%.

01/25/2008 每 The drop continues but our latest rotation was correct! The Greek market was hit hard by the recent global turmoil and the returns of the three banks have dropped again. However, our latest recommendation was indeed correct since Piraeus Bank (PEI) has declined -3.79% compared to -8.41% of EFG Eurobank (EFG) and -9.33% of National Bank of Greece (ETE).

01/17/2008 每 A sharp drop! The sharp decline in European markets has affected Greek stocks and, of course, the strategy. On 01/15 and 01/16 the ASE has dropped cumultatively -6.9% and the FTSE-20 has dropped cumulatively -7.23%. This had strong effects on the three banking stocks we are examining. As the strategy does not involve cash the effect was quite pronounced, with the two-week cumulative value of 1 Euro falling to 0.8096. This sharp drop is evident at the end of the series in the figure above.

 

*   Summary of Trading Recommendations

Trading recommendations are for the week of 03/12/2008 and are based on computations and data of the previous week.

 

Evaluation Period in weeks

25

50

75

100

125

150

200

300

325

Recommended Asset

ETE

ETE

ETE

ETE

ETE

ETE

ETE

ETE

ETE

 

[1.] See the data section for more on the asset nomenclature. The abbreviations correspond to three major Greek banks, EFG Eurobank ERGASIAS S.A. (EFG), PIRAEUS Bank S.A. (PEI) and National Bank of Greece S.A. (ETE).

[2.] The asset in bold corresponds to the evaluation period that has yielded the highest cumulative return in the historical evaluation.

 

*   Introduction

Welcome to the TbR webpage! Here you can find a real-time application of a trading method based on asset rotation. This is a follow-up extension to the EurOil Index project that I am also maintaining, where I present results from rotation-based trading for Oil and the Euro. Please visit the EurOil Index for additional information. In this project I expand the rotation strategy to three, rather than two, assets and I am using a different asset class and market. Specifically, I am using stock returns for three major Greek commercial banks that are being publicly traded in the Athens Stock Exchange.  The choice of these three banks is based on their market capitalization as they  are high-capitalization companies and are considered industry leaders in the Greek banking system.

 

*   Data

I am using data from publicly available, internet-based sources. The electronic editions of many Greek newspapers give free online access to historical data on companies that are listed in ASE. I collected the data from the website of Eleftherotypia newspaper because it provides the longest historical series. The three banks that I consider are: EFG Eurobank ERGASIAS S.A. (denoted EFG in the figures), PIRAEUS Bank S.A. (denoted PEI in the figures) and National Bank of Greece S.A. (denoted ETE in the figures). Please visit their respective websites for additional details. For performance comparison I consider the FTSE-20 index of the ASE which is comprised by the largest 20 listed companies. The actual analysis is done on a weekly frequency and I use weekly (Wednesday) data for the analysis starting from 01/05/2000.

 

*   Methodology

The trading methodology I am using here is based on some of my past research. I use a modification of the methods presented in the paper ※Market Timing and Cap Rotation§, by D. Thomakos, T. Wang and J. Wu, Mathematical and Computer Modeling (2007), vol. 46, pp. 278-291 (available on http://www.sciencedirect.com), to construct a trading strategy that rotates between the three assets based on their predicted signs. The methodology can be seen as a generalized &sign forecasting* approach although it is probably more informative than simple pairwise sign forecasting. The strategy gives long-only signals and does not take into account transactions costs so the results presented should be interpreted accordingly.

 

A rotation-based strategy will heavily depend on the choice of assets used in the rotation. For example, the weekly drawdown will always equal the minimum return among the three assets, if that particular asset is (wrongly) selected. Therefore the strategy*s success depends on whether it can correctly predict the relative sign of the assets most of the time and note that we do not need to be completely accurate all the time. This is illustrated in the historical evaluation that I present in the next section.

 

*   Simulated Trading and Performance (using data up to 03/05/2008)

Cumulative returns (based on longest evaluation period of 325 weeks)

Trading recommendation

for Wednesday

(based on data a week before)

Asset

Realized Return %

EFG

Realized Return %

PEI

Realized Return %

ETE

Success in Direction

Cumulative Value of 1 Euro

01/09/2008

ETE

-7.08

-6.06

-0.21

+

0.9978

01/16/2008

PEI

-13.19

-18.82

-11.68

-

0.8096

01/23/2008

PEI

-8.41

-3.79

-9.33

+

0.7717

01/30/2008

ETE

6.66

9.81

8.66

-

0.8583

02/06/2008

EFG

-1.78

-3.66

-1.22

-

0.8405

02/13/2008

PEI

-0.53

0.46

-4.06

+

0.8451

02/20/2008

ETE

-1.93

-3.59

-6.33

-

0.7817

02/27/2008

ETE

5.07

-0.09

4.73

-

0.8290

03/05/2008

PEI

-5.40

-7.90

-7.50

-

0.7500

03/12/2008

ETE

 

 

 

 

 

[1.] The realized return for each asset is the weekly return (from Wednesday to Wednesday) from the week before to the week of the trade 每 return measured as difference in log prices.

 

Discussion (based latest results)

The figures below summarize the trading performance of the proposed rotation-based strategy vs. the performance of each of the three stocks and the FTSE-20 index, in which the three banks participate. I present the accumulated value of 1 Euro invested at the beginning of different evaluation periods (Figure 1) and the corresponding information ratios (Figure 2).  The strategy clearly outperforms all three individual stocks for almost all evaluation horizons, trailing closely the performance of PEI. The strategy also outperforms the FTSE-20 index for all evaluation horizons as well. For an evaluation period of the last 100 weeks the strategy yields 1.20 Euro vs. 0.87 Euro of ETE and 0.91 Euro for the FTSE-20. For an evaluation period of 325 weeks the strategy yields 2.57 Euro vs. 1.67 Euro of PEI and 1.39 Euro for the FTSE-20.  In addition to its superior performance in terms of accumulated wealth, the rotation strategy has the highest information ratio across all evaluation periods.

 

To gauge the frequency of correct (and incorrect) decision-making of the strategy I calculated the average number of times that the strategy picked the asset with the highest (lowest) return. Surprisingly, these averages did not change drastically with the length of the evaluation period, something that can be considered a sort of &robustness* property of the strategy. The average number of correct decisions was about 40% (ranging from 35% to 44%) while the average number of incorrect decisions was about 25% (ranging from 16% to 29%). Note that this means that about 75% of the time the strategy did not pick the worst (lowest return) asset.

 

Figure 1 (updated 03/06/2008)

 

Figure 2 (updated 03/06/2008)

 

Disclaimer: The contents of this webpage are provided for information purposes only. Prices shown in this webpage are indicative and the author is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. The views in this publication are those of the author alone and are subject to change at any time, and he has no obligation to update the opinions or the information in this webpage. The author of this webpage does not accept any liability whatsoever for any direct or consequential loss arising from any use of the information provided. The information in this webpage is not intended to predict actual results, which may differ substantially from those presented. The author is not affiliated with any of the companies used in the analysis that is presented in this webpage.