• Systematic Trading Strategy - Dividend Risk Premium Strategies

  • Implemented the Dividend Risk Premium Strategies on SX5E Dividend Futures to capture the risk premium from "Pull-to-Realized" Effect of dividend volatility. The systematic strategies achieve sharpe ratios around 0.7 and became part of GS systematic trading strategies package for global clients.

  • Developed Slang Codes and SecDB Graph Implementations for strategy building, data base query, VWAP Calculation for equities and backtesting. Results applied to all equity strategies/ETFs of all desks.

  • Rationale: the volatility of dividend) (as an important part of stock return is much less than the stock returns. It's volatility is from the uncertainty of dividend payment, which fades away near maturity. Investors/Banks typically are left long exposure of the dividend (Short Futures to Hedge), this supply/demand (structuring) imbalance creates discount/risk premium for implied futures curve (price lower when larger than 2 years before maturity).

  • Challenge:

  • Skills: programming/Debugging, Testing Strategies, Fast Learning, Writing and Presentation

  • Related Strategies; Constant future roll strategies ( roll futures to get constant exposure of underlying) - sharpe 0.2,0.3; Constant Economic future roll strategies ( maintain the exposure of the first futures constant after starting to roll into the second futures - because as dividend realize around the year, the volatility and liquidity of the 1st futures becomes lower in the last 6 months before maturity. To avoid this (the economic exposure decreses), hold the 1st constant.

  • Questions:

    • STS desk = customer basket framework ( Marquee, API, UI) + Index Strategies + single stock strategies + risk premium strategies
    • customer - asset managers, pension funds, big corporations
    • strategies:
      • factor model
        • term structure risk
        • credit risk
        • vol carry risk
        • value-growth risk
        • SML risk
        • momentum risk
        • volatility risk
    • • momentum
      • carry
        • vol carry
        • relative carry
        • term
    • compete for : trading cost + servicing cost (charge rate)
    • related topic : backtesting + market impact + rebalance limit (up limit/ down limit etc) （optimization)
    • sales strats-trading strats- s&P (iga) AXIOMA(WLA) -risk premia- sts trading- hedging tools(swaps, single stock)

  • Related Academic Research:

    • Smart beta/ enhanced beta
    • factor strategy ( AQR factor models)
    • momentum strategy
    • Portfolio optimization - Black-Litterman, Risk- Parity, and Markwitz (machine learning and hireacical clustering)
    • numerical optimization

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"smart sigma" - use trading flows as risk metric (study trade flow for different investors to different factor portfolios, and use it as indicator for risk (eg. hedge fund has more risk, residual investors are important for predicting returns) and use this to adjust portfolio allocation and imporve Sharpe Ratio.