The strategy trades parent stocks based on subsidiary performance, going long parents with top-performing subsidiaries and short those with underperforming subsidiaries. Positions are equally weighted and rebalanced monthly.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Subsidiary – Parent, Equity, Momentum
I. STRATEGY IN A NUTSHELL
This strategy invests in parent stocks listed on NYSE, AMEX, and NASDAQ with prices between $5 and $1,000. Each month, parent stocks are ranked into quintiles based on the previous month’s realized returns of their subsidiaries. The strategy goes long parents with top-performing subsidiaries and shorts parents with bottom-performing subsidiaries, with equal weighting and monthly rebalancing.
II. ECONOMIC RATIONALE
The approach exploits delayed parent-stock reactions to value-relevant information from subsidiaries. Limited investor attention and barriers to arbitrage create potential market inefficiencies, allowing the strategy to capture return reversals between parent and subsidiary stocks.
III. SOURCE PAPER
Corporate Equity Ownership and Expected Stock Returns [Click to Open PDF]
Li, Tang,Yan, Tsinghua University, Fordham University – Gabelli School of Business, Fordham University – Gabelli School of Business
<Abstract>
We investigate the cross-sectional predictive relations between stock returns of two public firms with one firm, the parent, owning partial equity of the other, the subsidiary. We find that high past returns of the subsidiary (parent) predict high future returns of the parent (subsidiary). The subsidiary-to-parent predictability does not exist before the ownership is established, remains intact after controlling for a variety of stock characteristics, and is stronger among stocks with higher barriers to arbitrage and lower degree of investor attention. The parent-to-subsidiary predictability is, however, unlikely to be caused by corporate equity ownership, but by other forces such as the industry lead-lag effects.
IV. BACKTEST PERFORMANCE
| Annualised Return | 14.03% |
| Volatility | 14.51% |
| Beta | N/A |
| Sharpe Ratio | 0.97 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
