Financial econometrics-Skewness and momentum, trading strategies

Exercise – Skewness and momentum 
This empirical exercise is based on the work by Jacobs, Regele and Weber (2015). 
questions include:
1Portfolios and factors construction 10%
2Trading strategies 60%
3 risk attribution 30%
check the file

Instructions

The maximum number of pages for this exercise is 5, excluding tables and graphs. Papers exceeding the length limit will only be evaluated on the first 5 pages. Set up the econometrics model in the matlab in a mfile and answer the questions in the report.

Please upload both matlab mfile and the report.

Exercise – Skewness and momentum

This empirical exercise is based on the work by Jacobs, Regele and Weber (2015).

Portfolios and factors construction

Let’s construct tradable portfolios from the given dataset.

  1. Upload data (filename: assignment2015.mat) in Matlab. 
 https://dl.dropboxusercontent.com/u/41046276/assignment2015/assignment2015.mat
  2. 
(Link).
  3. Data contain daily close to close returns and market cap for a large cross-section of stocks in the US. The first row contains the permno of any given stock, whereas the second row contains the date, the third the market cap, and the fourth the daily returns.
  4. Upload Fama-French, momentum factors and NYSE ME breakpoints monthly data from Kenneth French’s website. (careful, ME breakpoints are divided by 1,000,000 on French’s database, so you will have to multiply the numbers by 1,000,000 to compare them with the market cap in the .mat file)

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

(Link).

  1. Form traditional momentum decile portfolios, filtering out the stocks in the bot- 
tom ME decile.
  2. Form skewness enhanced momentum decile portfolios following the methodology of Jacobs, Regele and Weber (2015), filtering out the stocks in the bottom ME

decile. (10% of mark)

Trading strategies

Calculate the return series of the following trading strategies, considering both equal

and value weighting schemes, rebalanced every month:

  • Traditional Momentum strategy, filtering out the stocks in the bottom ME decile.
  • Skewness enhanced Momentum strategy, filtering out the stocks in the bottom ME decile. 
For any trading strategy, report summary statistics, Sharpe ratios, t-ratios, maximum drawdowns, a plot of the cumulative returns over time, portfolio turnover and the average number of stocks within any portfolio. 
Comment on the different performances and risk-return profiles of the strategies, on the benefits of combining skewness and momentum, and on the effects of the weighting scheme. 
(60% of mark)

Risk attribution 
Run regressions of each strategy’s returns on the three Fama-French factors plus mo- mentum and comment on the sign, size and the significance of the estimated alphas and betas. 
(30% of mark)

References 
Jacobs, H., T. Regele and M. Weber (2015). Expected Skewness and Momentum. Available on SSRN. (Link).

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