Trading Amongst Estimize In Addition To I/B/E/S Lucre Estimates Data

By Yang Gao

Estimize is an online-community utilizing 'wisdom of crowds' to offering word most market. It contains a broad make of crowd-sourced estimates from over 4,500 buy-side, sell-side in addition to private analysts. Studies (from Deustche Bank in addition to Rice University with others) exhibit estimates from Estimize are to a greater extent than accurate than estimates from traditional sell-side analysts.

The outset strategy nosotros tested is a mean reversion strategy developed past times the quantitative inquiry squad from Deltix using Estimize’s data. This strategy is based on the persuasion that post-earning-announcement prices typically revert from the short-term tendency driven past times the to a greater extent than recent Estimize estimates exactly before the announcement. We backtested this strategy with S&P100 over the menses betwixt 2012/01/01 in addition to 2013/12/31. (Even though Estimize has 2014 data, nosotros create non bring the corresponding survivorship-bias-free toll information from the Center for Research inwards Securities Prices that includes the closing bid in addition to enquire prices.) With 5bp one-way transaction cost, nosotros establish that the backtest shows a Sharpe ratio of 0.8 in addition to an average annual render of 6%.  The next figure is the cumulative P&L of the strategy based on $1 per stock position.

Cumulative P&L of Deltix Mean Reversion Strategy with Estimize 

It surprised us that a mean-reverting instead of a momentum strategy was used inwards conjunction with Estimize data, since earnings estimates in addition to announcements typically generate toll momentum. In guild to exhibit that this render is actually driven past times the information inwards Estimize in addition to non exactly due to toll reversal, nosotros render a benchmark mean-reverting strategy that uses prices lonely to generate signal:

1. Find long menses T in addition to brusk menses T_s, where T is average menses of the reporting of all the quarterly estimates in addition to T_s is average menses of the reporting of the latest 20% of all estimates.
2. Calculate stock render R over T in addition to Rs over T_s, in addition to allow delta = R - Rs
3. Buy stocks with delta > 0 at unopen before an earnings annunciation in addition to locomote out the positions adjacent morn at the opened upward subsequently the announcement.
4. Sell stocks with delta < 0 at unopen before an earnings annunciation in addition to locomote out the positions adjacent morn at the opened upward subsequently the announcement.
5. Hedge internet exposure with SPY during the entire asset period.

This benchmark shows no pregnant positive render in addition to and therefore it does seem that in that place is useful information inwards the Estimize information captured past times Deltix’s mean-reversion strategy.

Next, nosotros compare the traditional earnings estimates from I/B/E/S gathered from sell-side Wall Street analysts to the crowd-sourced Estimize estimates. Backtest showed the same Deltix hateful reversion strategy described inwards a higher house but using I/B/E/S estimates gave negative render over the same S&P100 universe in addition to over the same 2012-2013 period, ane time again supporting the thesis that Estimize estimates may live superior.

Since Deltix's hateful reversion strategy gives negative returns on I/B/E/S data, it is natural to come across if a momentum strategy would run instead: if the short-term average approximate is higher than the long-term average approximate (i.e. analogous to delta < 0 above), nosotros hold back the toll to motility upward in addition to vice verse.

The backtest number of this momentum strategy over the same universe in addition to fourth dimension menses is quite promising: with 5bp transaction cost, the Sharpe ratio = 1.5 in addition to average annual render = 11%. The next figure is the daily P&L of the strategy based on $1 per stock position

 Cumulative P&L of momentum Strategy with I/B/E/S

We tried the same momentum strategy using Estimize information over 2012-2013, in addition to it generated negative returns this time. This is non surprising since nosotros establish before that the hateful reversion strategy using Estimize information generated positive returns.

We proceeded to backtest this momentum strategy over the S&P100 using out-of-sample I/B/E/S information betwixt 2010 in addition to 2012, in addition to unfortunately the strategy failed in that place too. The next figure is the daily P&L of the strategy from 2010-2014.

Cumulative P&L of momentum Strategy with I/B/E/S 

So how would Deltix’s mean-reversion strategy with Estimize information run over this out-of-sample period? Unfortunately, nosotros won’t know because Estimize didn't laid out collecting information until the halt of 2011. The next tabular array is a summary on the annual returns comparison unlike strategies using unlike information sets in addition to periods.

Strategies	Mean-Reversion	Momentum
Estimize (2012.01-2013.12)	6%	-9%
I/B/E/S (2012.01-2013.12)	-17%	11%
I/B/E/S (2010.01-2011.12)	1.8%	-6.4%

As a result, nosotros cannot conclude that Estimize information is consistently meliorate than I/B/E/S information inwards terms of generating alpha: it depends on the strategy deployed. We also cannot create upward one's hear which strategy – mean-reversion or momentum – is consistently better: it depends on the fourth dimension menses in addition to the information used. The solely decision nosotros tin sack achieve is that the brusk duration of the Estimize information coupled with our lack of proper toll information inwards 2014 agency that nosotros cannot bring a statistically pregnant backtest. This Earth of inconclusiveness volition of course of teaching live cured inwards time.

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Yang Gao, Ph.D., is a inquiry intern at QTS Capital Management, LLC.

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Industry Update

(No endorsement of companies or products is implied past times our mention.)

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Workshop Update

Our adjacent online workshop volition be Millisecond Frequency Trading on March 25-26. It is for traders who are interested inwards intraday trading (even if non at millisecond frequency) in addition to who desire to defend against certain HFT tactics.

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Managed Account Program Update

Our FX Managed Account program had a rigid complete inwards 2014, with annual internet render of 69.86%.

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