Combine the January Effect and Positive Yield Curve for Higher Returns?
Stock Strategies and the January Barometer and the Yield Curve
- Lichend Sun, Chris Stivers, and Ajay Kongera
- A version of the paper can be found here.
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The January Barometer states that the sign of the stock-market’s returns in January can predict the subsequent 11-month stock-market return over February–December. Cooper et al. (2010) show that the best way to use the January Barometer is to be long following positive Januarys and invest in T-bills following negative Januarys. In this study, similar to the January Barometer, we ﬁnd that the 11-month average return following upwardsloping yield curves is signiﬁcantly higher than the 11-month average return following downward-sloping yield curves. Further, we ﬁnd that trading strategies that combine the trading signals from the January Barometer and the yield curve comfortably outperform the best strategy that relies on the January Barometer alone. We show that the combined ‘January barometer-yield curve’ strategy has lower risks and higher Sharpe ratios.
Combining the January effect and a positive yield curve generates some seriously good looking annual returns.
- There are two main variables of interest for this strategy:
- The return of the value-weighted index from CRSP each January.
- The December yield curve measured as the 10-year U.S. Treasury constant maturity rate minus the 1-year U.S. Treasury constant maturity rate.
- The paper combines the signals from the January stock returns and the December yield curve.
- Here is the strategy that performs the best:
- If the January stock returns are positive and the December yield curve is upward sloping (positive), go long the stock market from February to December. If either the January stock returns are negative or the December yield curve is downward sloping (negative), invest in T-bills from February to December.
- This stragey outperforms a long-only strategy, as well as using each signal individually.
- The average return for this strategy (while being invested in stocks each Januray) from 1954-2010 is 12.63%, with the worst annual performance being -7.70% in 2009.
- See Tables 5 – 7 to view the 5 different strategies that are compared in the paper.
- Shorting the market when the January return is negative or the yield curve is downward sloping yields the worst results (see Table 6).
- I smell data-mining. We would need to see similar results in other countries and get a laundry list of robustness tests before I believe this one.
Anyone tried these ideas before?
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Definitions of common statistics used in our analysis are available here (towards the bottom)