Research has shown that several factors cause spinoffs to have an increased initial volatility. The trading system in this report analyses and trades on 39 different spinoffs from 10 years back, focusing on spinoffs from the New York Stock Exchange.
The main driver of the system is the high initial volatility created in spinoffs from IPO. The spinoffs were chosen based on two criteria: institutional ownership and market capitalisation relative to parent company.
The system makes trades based on applying two moving averages and analyse their movement and interception. The strategy is spilt into two part. At first, the system analyses the primary two weeks after the spinoff and optimises the EMA/SMA-pair. The result for the first part is utilised in the second part and is used for trading during the third and fourth week after the spin-off.
Over the ten-year period the system was able to beat the S&P500 by 20 percentage points. The system traded a total of 20 months and generated an average excess return, per two-week period, of 4.75%. The strategy had a beta of 0.49, a yearly Sharpe ratio of 1.99 and an alpha of 0.0148.
Analysts: Daniel Hammastedt & Jacob Heneby