This page mostly offers brief project ideas, but just because a project is dealt with briefly here does not mean that it does not have a lot of potential.
In the world of IID returns, the variance of the holding period return (call it V) grows linearly with the length of the holding period. We know the world does not give us IID returns, so the phenomenon of interest is how V depends on holding period length L. Now even to have this discussion we seem to be taking stationarity for granted, and that might not be right, but lets forge ahead anyway.
Here are some stylized (mostly made up, but backed by some experience) "facts":
You get the picture. What is left to "do" is to operationalize these assertions both data analytically and (possibly) in the context of models. None of these is cut in stone or even super-well defined. Still, they are probably "true" and they add richness to our understanding of asset returns.
I've created a resource page for that collect information about the CEFs that implement Buy-Write Strategies. At the end of the page you will also find the descriptions of some projects. I certainly hope that at least a few students take up some of these.
Dividend Capture is one idea, and Buy-Write is another idea. In general, it is a bad idea to take two new ideas and jam them together until each is well understood on its own. Still, it's something that strikes me as having potential --- so, let's break that old rule of style and throw both themes into one pot.
Because of the kinds of investors who choose CEFs, the prices of CEFs may respond to dividend payments differently than do stocks that have a more substantial institutional following.
This puts several dividend play possibilities into play:
- By eye-ball it looks like some of these funds have a "price run up" prior to the ex-dividend date. Does this hold water?
- In theory, a stock should go down on ex-dividend day by the amount of the dividend. If it goes down too little, there is the possibility of "dividend capture." That is you buy on the day before the ex-dividend date and you sell on the ex-dividend data and you pick up some excess return. At times there have been big players involved in this game, sometimes for tax reasons. For liquid major cap stocks, there is not much chance of such a strategy working. In these goofy CEFs, I think it may even boomerang! That is, the stock too often goes down by MORE than the dividend on the ex-dividend date. This is non-sense economically, but it fits the "income preference" profile of the investors who choose these funds.
- The history of the Buy-Write CEFs is too short to show it, but older fixed income CEFs with managed dividends have an interesting predictability to them. The dividend policy depletes the capital in a predicable way, so at some point the dividend must be decreased. This happens in a stair-step way and it makes the natural niche holders go nuts, they sell the fund, and the discount widens. This suggests the possibility of a short selling strategy. If you analyze the capital base and you think that it is about time for the dividend to be re-adjusted, you start thinking about shorting the stock. Here there are two possibilities, you can short before the announcement date, or you can really sandbag --- wait until the announcement date and only short if there is an announce reduction. Most holders will pay no attention to the announcement, and only dump their share after they actually see a "smaller dividend check." It is not easy to short these funds in size, so professionals may find this uninteresting --- which means it might persist a nice little "personal" game.