Quantitative Models and Construction Methods Model Name: Three-Tier Global Liquidity Risk Warning Model - **Model Construction Idea**: The model aims to dynamically monitor liquidity risk from the policy source to the trading end, capturing the full chain of liquidity risk transmission[1] - **Model Construction Process**: 1. **Central Bank Liquidity**: Monitors central bank policy movements from three dimensions: price, quantity, and expectations. The price dimension uses the global central bank policy rate diffusion index to track the policy movements of 27 major central banks. The quantity dimension uses the Federal Reserve liquidity support indicator to measure the expansion of the Fed's balance sheet through term transformation and credit enhancement channels. The expectation dimension uses the Bloomberg Fedspeak index and market implied interest rate expectations to track the marginal changes in Fed interest rate expectations[2][3] 2. **Funding Liquidity**: Monitors leverage funding tightness through repo financing and cross-border arbitrage indicators. The Secured Overnight Financing Rate (SOFR) represents the short-term financing cost in the interbank market with Treasury collateral. The Risk Reversal (RR) monitors the abnormal jumps in risk reversal options of major carry trade currency pairs to capture the deleveraging pressure in the foreign exchange market[4][5] 3. **Market Liquidity**: Utilizes implied volatility across multiple assets to depict market trading friction. Constructs a multi-period comprehensive stress index using VIX, VXN, RVX, MOVE, GVZ, OVX, VXEEM, and COP to identify abnormal mutation points using a rolling threshold Zscore framework[6][7] - **Model Evaluation**: The model effectively avoids periods of broad asset declines, significantly reduces strategy drawdowns, and optimizes risk-adjusted returns of the strategy. It is universally applicable in global asset allocation[1][8] Model Backtesting Results - **Baseline Strategy**: Annualized return 5.31%, Sharpe ratio 0.56, maximum drawdown -34.55%, Sortino ratio 0.75[9] - **Three-Tier Liquidity Stress Signal Timing Strategy**: Annualized return 8.76%, Sharpe ratio 1.22, maximum drawdown -14.09%, Sortino ratio 1.77[9] Quantitative Factors and Construction Methods Factor Name: Central Bank Liquidity - **Factor Construction Idea**: Monitors central bank policy movements from three dimensions: price, quantity, and expectations[2] - **Factor Construction Process**: 1. **Price Dimension**: Uses the global central bank policy rate diffusion index to track the policy movements of 27 major central banks. The index is constructed by calculating the net easing score of each country using a one-year rolling window and then equally summing the scores to obtain the global central bank policy rate diffusion index. The pressure signal is generated by quarterly differencing the diffusion index[2][3] 2. **Quantity Dimension**: Uses the Federal Reserve liquidity support indicator, defined as the ratio of medium- and long-term Treasury bonds, MBS, and agency bonds to the sum of cash in circulation, reverse repos, and reserves. The pressure signal is generated by quarterly differencing the smoothed series of the indicator[3][10] 3. **Expectation Dimension**: Uses the Bloomberg Fedspeak index and market implied interest rate expectations. The Fedspeak index is constructed by sentiment scoring of Fed officials' speeches using a fine-tuned RoBERTa model. The market implied interest rate expectations are derived from the difference between the 3M1M Swap OIS and the EFFR. The pressure signals are generated by quarterly differencing the series[3][11][12] - **Factor Evaluation**: The comprehensive pressure signal of central bank liquidity effectively distinguishes the performance of liquidity-sensitive assets during stress and non-stress periods, providing early warning of systemic risk accumulation[13][14] Factor Backtesting Results - **Central Bank Liquidity Stress Signal Timing Strategy**: Annualized return 7.55%, Sharpe ratio 1.18, maximum drawdown -14.09%, Sortino ratio 1.67[9][15] Factor Name: Funding Liquidity - **Factor Construction Idea**: Monitors leverage funding tightness through repo financing and cross-border arbitrage indicators[4] - **Factor Construction Process**: 1. **Repo Market**: Uses the Secured Overnight Financing Rate (SOFR) to represent the short-term financing cost in the interbank market with Treasury collateral. The pressure signal is generated when SOFR exceeds at least two of the key rates: IORB, EFFR, FFRU, and OIS[4][16] 2. **Foreign Exchange Market**: Uses the Risk Reversal (RR) of major carry trade currency pairs to monitor the deleveraging pressure. Constructs a comprehensive RR stress index by calculating the Zscore of the RR indicators and averaging the scores of five currency pairs. The pressure signal is generated when the comprehensive score exceeds the rolling threshold upper limit for at least two days within the past ten trading days[4][17][18] - **Factor Evaluation**: The comprehensive pressure signal of funding liquidity effectively identifies liquidity risk at the funding level, providing complementary insights to single indicators[19][20] Factor Backtesting Results - **Funding Liquidity Stress Signal Timing Strategy**: Annualized return 8.43%, Sharpe ratio 0.99, maximum drawdown -21.65%, Sortino ratio 1.38[9][21] Factor Name: Market Liquidity - **Factor Construction Idea**: Utilizes implied volatility across multiple assets to depict market trading friction[6] - **Factor Construction Process**: 1. **Market Liquidity Stress Index**: Constructs a multi-period comprehensive stress index using VIX, VXN, RVX, MOVE, GVZ, OVX, VXEEM, and COP. The index is constructed by calculating the Zscore of the implied volatility indicators and averaging the scores. The pressure signal is generated when the comprehensive score exceeds the rolling threshold upper limit for at least two days within the past ten trading days[6][22] - **Factor Evaluation**: The market liquidity stress signal effectively provides early warning of liquidity crises, enhancing the risk-adjusted returns of liquidity-sensitive asset strategies[23][24] Factor Backtesting Results - **Market Liquidity Stress Signal Timing Strategy**: Annualized return 7.42%, Sharpe ratio 0.91, maximum drawdown -23.65%, Sortino ratio 1.28[9][25]