Constant Leverage Covering Strategy for Equity Momentum Portfolio with Transaction Costs
Round 1
Reviewer 1 Report
Comments and Suggestions for Authors
1) I am not sure if using “I” statements sound good or if it would be better to use “impersonal” form.
2) Introduction should clearly state what is novel, why it is important and how it is done.
3) Also all information must be referenced with some source.
4) The paper is quite randomly ordered. There needs to be step by step logic and consistent structure in paragraphs and sections. Just a small example, you sometimes aforementioned further sections without previous one.
5) There needs to be proper Data section describing data, then Methodology section describing methods. Finally, Results section and last section summary of Conclusions.
6) Currently the paper does not posses proper standard structure of a scientific paper. It is something between a report and conference talk.
7) References are too few.
8) There needs to be some benchmark model and comparison of your method and a benchmark.
9) This must be done with some measures but also some testing (statistical test).
10) Currently, I do not provide more remarks as the paper is not well written in my opinion, and probably more corrections would be needed, but only after the whole structure would be made tidy enough to easily read the paper.
11) There needs also be a table with explanation of all abbreviations used in the paper as there are many.
Comments on the Quality of English Language
1) I am not sure if using “I” statements sound good or if it would be better to use “impersonal” form.
4) The paper is quite randomly ordered. There needs to be step by step logic and consistent structure in paragraphs and sections. Just a small example, you sometimes aforementioned further sections without previous one.
5) There needs to be proper Data section describing data, then Methodology section describing methods. Finally, Results section and last section summary of Conclusions.
Author Response
Dear Editor,
Thank you for considering my research paper. I am looking forward to working with you through the publication process.
I appreciate the insightful comments of the referee. I address each comment one by one at the end of this document.
I used my original word document because the comments of the referee required me to reorganize some sections. I create two appendices to improve the efficiency of the document. I stopped using the track changes feature because hyperlinks of the figures and tables were glitching when overlapping with the track changes feature.
Comments and Suggestions for Authors
- I am not sure if using “I” statements sound good or if it would be better to use “impersonal” form
*I have minimized the use of the “I” statement.
- Introduction should clearly state what is novel, why it is important and how it is done.
*I rewrote the introduction. I emphasize what is novel and how it was done.
- Also, all information must be referenced with some source
*I increased the use of sources.
- The paper is quite randomly ordered. There needs to be step by step logic and consistent structure in paragraphs and section. Just a small example, you sometimes aforementioned further sections without previous one.
*I reorganize the structure of the paper
- There needs to be a proper Data section describing data, then Methodology section describing methods. Finally, results section and last section summary of conclusions.
*I put all the data section together and all the methodology section together.
*After reorganizing the paper, I did a better job labeling the subsections.
- Currently the paper does not possess proper standard structure of a scientific paper. It is something between a report and conference talk.
*I sent some data description to the appendix.
*the section that discusses “Momentum portfolio without transaction costs: 1927 to 2021” to the appendix. It is not fundamental to the core results.
- References are too few
I increased the references.
- There needs to be some benchmark model and comparison of your method and a benchmark.
*I emphasize how I compare my results against the Constant Volatility (CVol) covering strategy developed by Barroso and Santa-Clara (2015).
- This must be done with some measures but also some testing (statistical test).
*Statistical tests on the return distribution.
* I decline to add statistical tests because the referee has not specified which statistical tests does she/he wants to see. Furthermore, as the referee noted, the paper is already rich in results which would make the paper more difficult to read. Also, the emphasize of the paper is comparing the covering strategy developed in this paper, against Barroso and Santa-Clara (2015), the Winner minus Loser portfolio, and the stock market.
*The paper already contains several statistical tests.
- Currently, I do not provide more remarks as the paper is not well written in my opinion, and probably more corrections would be needed, but only after the whole structure is made tidy enough to easily read the paper.
- There needs also be a table with explanation of all abbreviations used in the paper as there are many.
I deleted unnecessary abbreviations.
I did not writ a table with explanations of abbreviations because now there are only three abbreviations:
*CVol: Constant Volatility
*CLvg: Constant Leverage
*WmL: Winners minus losers or Momentum.
Author Response File: 
Author Response.pdf
Reviewer 2 Report
Comments and Suggestions for Authors
“Constant Leverage Covering Strategy for Equity Momentum Portfolios with Transaction Costs” is an interesting article that, as the name suggests, develops a constant leverage covering strategy that factors in transaction costs for individual stocks and relies only on past performance. This research is important in making the approach tenable for risk averse investors seeking to manage downside risk in a crash and filling the gap in existing literature that did not account for transaction costs.
I recommend two changes prior to publication. First, the paper does reference the key literature, but it is nevertheless lightly sighted and there is a range of related literature that could be incorporated into the literature review section of the introduction. This has both the benefit of making the paper a more useful tool for readers in pointing them to related resources, and also increases the visibility of your paper.
The second recommendation is creating a clear methods section after the introduction. Currently, the mythology is strung throughout the paper. Paragraph 4 of page 5, the momentum returns and portfolio algorithm of page 7 both discuss aspects of the methodology, as well as page 15. While it’s fine to go into more detail in each of these places, there should be a clear section at the beginning where a reader can turn for a detailed breakdown of the methods. It is not uncommon for academics to read this section first to determine whether a study is sound and if the findings will be relevant. Requiring the reader to piece the methodology together as they go presents a major problem for the article. Fortunately, this can be easily solved by inserting a section that details the methods.
I would also recommend editing lines that were written in the first person. For example changing “However, I find that these stylized facts are only a subset of more general properties.” to “However, the stylized facts are only a subset of more general properties.” retains the same meaning while sounding more academic.
I hope these suggestions help in revising this interesting article.
Author Response
1. I am not sure if using “I” statements sound good or if it would be better to use “impersonal” form
*I have minimized the use of the “I” statement.
2. Introduction should clearly state what is novel, why it is important and how it is done.
*I rewrote the introduction. I emphasize what is novel and how it was done.
3. Also, all information must be referenced with some source
*I increased the use of sources.
4. The paper is quite randomly ordered. There needs to be step by step logic and consistent structure in paragraphs and section. Just a small example, you sometimes aforementioned further sections without previous one.
*I reorganize the structure of the paper
5. There needs to be a proper Data section describing data, then Methodology section describing methods. Finally, results section and last section summary of conclusions.
*I put all the data section together and all the methodology section together.
*After reorganizing the paper, I did a better job labeling the subsections.
6. Currently the paper does not possess proper standard structure of a scientific paper. It is something between a report and conference talk.
*I sent some data description to the appendix.
*the section that discusses “Momentum portfolio without transaction costs: 1927 to 2021” to the appendix. It is not fundamental to the core results.
7. References are too few
I increased the references.
8. There needs to be some benchmark model and comparison of your method and a benchmark.
*I emphasize how I compare my results against the Constant Volatility (CVol) covering strategy developed by Barroso and Santa-Clara (2015).
9. This must be done with some measures but also some testing (statistical test).
*Statistical tests on the return distribution.
* I decline to add statistical tests because the referee has not specified which statistical tests does she/he wants to see. Furthermore, as the referee noted, the paper is already rich in results which would make the paper more difficult to read. Also, the emphasize of the paper is comparing the covering strategy developed in this paper, against Barroso and Santa-Clara (2015), the Winner minus Loser portfolio, and the stock market.
*The paper already contains several statistical tests.
10. Currently, I do not provide more remarks as the paper is not well written in my opinion, and probably more corrections would be needed, but only after the whole structure is made tidy enough to easily read the paper.
11. There needs also be a table with explanation of all abbreviations used in the paper as there are many.
I deleted unnecessary abbreviations.
I did not writ a table with explanations of abbreviations because now there are only three abbreviations:
*CVol: Constant Volatility
*CLvg: Constant Leverage
*WmL: Winners minus losers or Momentum.
Round 2
Reviewer 1 Report
Comments and Suggestions for Authors
1) I do not see much improvement in the paper. Although, I see some improvement at all. Nevertheless, changes should have been emphasised by, for example, different color.
2) "I decline to add statistical tests because the referee has not specified which statistical tests does she/he wants to see. Furthermore, as the referee noted, the paper is already rich in results which would make the paper more difficult to read." This reply in my opinion disqualifies the paper from putting any more energy into reviewing it. In case of an economic empirical study employing tests additionally to simply reporting some accuracy measures is a standard and obligatory technique differentiating low quality research from a properly conducted one. Scientists from this field, tackling with empirical data, should be able to properly find/propose suitable test for their research. Inability to have even an initial propisition for that part of a research in my opinion disqualifies consideration of a paper. Such questions would be proper in non-economic journal or at graduate course level not in case of repubable specialists journal. Secondly, stating that adding statistical test would unnecessary expand paper is lighlty speaking ridiculous. Once again, just reporting numerous measures without checking if the differences are not just a random coincidence is not a proper way of conducting data science. If the authors claim something about predictability and make some "forecasting" they should for example start from Diebold-Mariano test. However, these tests or let us say just idea was further improved. There are many tests in this context and authors should initially proposed something in their paper. A reviewer can "review" their method - but not just say what to do since scratch - especially if we talk about basics of research (in regard with data research).
3) There is also no benchamrk model in the paper emphaised. You claim that "CVol" is benchmark. But why this model actually? And how do we know that difference between this method and yours is indeed statistically significant?
4) For example, you claim that your observations (were they derived from some in-sample period? or whole sample, becuse whole sample analysis is not usuful for any practice as we do not have then any verification/testing of a strategy, but just fitting to known data?) lead to some strategy? Can you perform some simulations your strategy vs some other (maybe random buy/sell etc. or some other simple strategy)? In order to give the reader argument that your strategy is better.
Author Response
Dear Editor,
Thank you for considering my research paper. I am looking forward to working with you through the publication process.
I appreciate the insightful comments of the referee. I implemented all the changes recommended by the referee. I address each comment one by one at the end of this document.
Comments and Suggestions for Authors
- “Constant Leverage Covering Strategy for Equity Momentum Portfolios with Transaction Costs” is an interesting article that, as the name suggests, develops a constant leverage covering strategy that factors in transaction costs for individual stocks and relies only on past performance. This research is important in making the approach tenable for risk averse investors seeking to manage downside risk in a crash and filling the gap in existing literature that did not account for transaction costs.
- I marked in red the changes I made.
- I recommend two changes prior to publication. First, the paper does reference the key literature, but it is nevertheless lightly sighted and there is a range of related literature that could be incorporated into the literature review section of the introduction. This has both the benefit of making the paper a more useful tool for readers in pointing them to related resources, and also increases the visibility of your paper.
- The references in the literature review section increased by 14 articles. The new text in the literature review is highlighted in red.
- The second recommendation is creating a clear methods section after the introduction. Currently, the mythology is strung throughout the paper. Paragraph 4 of page 5, the momentum returns and portfolio algorithm of page 7 both discuss aspects of the methodology, as well as page 15. While it’s fine to go into more detail in each of these places, there should be a clear section at the beginning where a reader can turn for a detailed breakdown of the methods. It is not uncommon for academics to read this section first to determine whether a study is sound and if the findings will be relevant. Requiring the reader to piece the methodology together as they go presents a major problem for the article. Fortunately, this can be easily solved by inserting a section that details the methods.
- I am grateful for this comment, I remove the methodology discussions from the literature review.
- The section that describes Covering strategies in abstract was moved to section 4.3 (section 4 describes methodology).
- The section that describes volatility measurement was moved to section 4.4 (section 4 describes methodology).
- I would also recommend editing lines that were written in the first person. For example changing “However, I find that these stylized facts are only a subset of more general properties.” to “However, the stylized facts are only a subset of more general properties.” retains the same meaning while sounding more academic.
- All the lines that were written in the first person were edited.
- Format references properly
- I have standardized the format of the references.
- I hope these suggestions help in revising this interesting article.
- I am grateful for this suggestions. I think they have improved this article.
Author Response File: Author Response.pdf
Round 3
Reviewer 1 Report
Comments and Suggestions for Authors
Ok, the paper has been improved and my comments answered in a good way. I can suggest "acceptance" of the paper.
