Quantitative Factors and Construction Methods 1. Factor Name: Book-to-Price Ratio (BP) - **Construction Idea**: Measures the valuation of a stock by comparing its book value to its market value [12] - **Construction Process**: - Formula: $ BP = \frac{\text{Current Book Value}}{\text{Current Market Value}} $ [12] - **Evaluation**: BP is a widely used valuation factor, and its positive IC and excess return indicate its effectiveness in identifying undervalued stocks [8][10] 2. Factor Name: BP Three-Year Percentile - **Construction Idea**: Evaluates the relative valuation of a stock over the past three years [12] - **Construction Process**: - Formula: BP Three-Year Percentile = Percentile rank of the current BP within the last three years [12] - **Evaluation**: This factor provides a historical perspective on valuation, which can enhance its predictive power [8][10] 3. Factor Name: Quarterly Gross Profit Margin - **Construction Idea**: Measures profitability by comparing gross profit to sales revenue [12] - **Construction Process**: - Formula: $ \text{Quarterly Gross Profit Margin} = \frac{\text{Quarterly Gross Profit}}{\text{Quarterly Sales Revenue}} $ [12] - **Evaluation**: A positive IC and strong excess return suggest this factor is effective in identifying profitable companies [8][10] 4. Factor Name: 1-Month Average Daily Turnover - **Construction Idea**: Captures liquidity by analyzing the average daily turnover over the past month [12] - **Construction Process**: - Formula: 1-Month Average Daily Turnover = Mean of daily turnover over the last 20 trading days [12] - **Evaluation**: This factor demonstrates strong performance in short-term IC and excess return, indicating its utility in capturing liquidity-driven opportunities [8][10] 5. Factor Name: 1-Month Turnover Volatility - **Construction Idea**: Measures the variability of turnover over the past month to capture liquidity dynamics [12] - **Construction Process**: - Formula: 1-Month Turnover Volatility = Standard deviation of daily turnover over the last 20 trading days [12] - **Evaluation**: High IC and excess return suggest this factor effectively captures liquidity-related anomalies [8][10] 6. Factor Name: Fama-French Three-Factor 1-Month Residual Volatility - **Construction Idea**: Measures idiosyncratic risk by analyzing the residual volatility from the Fama-French three-factor model [12] - **Construction Process**: - Formula: Residual Volatility = Standard deviation of residuals from the regression of daily returns on the Fama-French three factors over the last 20 trading days [12] - **Evaluation**: This factor is effective in capturing risk-related anomalies, as evidenced by its strong IC and excess return [8][10] --- Factor Backtesting Results IC Performance - **BP**: Weekly IC = 5.32%, Monthly IC = 8.04%, Annual IC = 1.81% [8] - **BP Three-Year Percentile**: Weekly IC = 6.26%, Monthly IC = 10.63%, Annual IC = 3.10% [8] - **Quarterly Gross Profit Margin**: Weekly IC = 5.61%, Monthly IC = 3.29%, Annual IC = 0.64% [8] - **1-Month Average Daily Turnover**: Weekly IC = 12.54%, Monthly IC = 14.06%, Annual IC = 2.03% [8] - **1-Month Turnover Volatility**: Weekly IC = 10.49%, Monthly IC = 13.42%, Annual IC = 2.70% [8] - **Fama-French Three-Factor 1-Month Residual Volatility**: Weekly IC = 8.93%, Monthly IC = 13.16%, Annual IC = 3.32% [8] Excess Return Performance - **BP**: Weekly Excess Return = -0.04%, Monthly Excess Return = 1.27%, Annual Excess Return = 2.22% [10] - **BP Three-Year Percentile**: Weekly Excess Return = -0.25%, Monthly Excess Return = 2.07%, Annual Excess Return = 3.63% [10] - **Quarterly Gross Profit Margin**: Weekly Excess Return = 0.68%, Monthly Excess Return = 1.05%, Annual Excess Return = 4.64% [10] - **1-Month Average Daily Turnover**: Weekly Excess Return = 0.64%, Monthly Excess Return = 2.96%, Annual Excess Return = 7.46% [10] - **1-Month Turnover Volatility**: Weekly Excess Return = 0.55%, Monthly Excess Return = 2.95%, Annual Excess Return = 9.61% [10] - **Fama-French Three-Factor 1-Month Residual Volatility**: Weekly Excess Return = 0.29%, Monthly Excess Return = 2.75%, Annual Excess Return = 7.03% [10]