Quantitative Models and Construction Methods 1. Model Name: Diffusion Index Model - **Model Construction Idea**: The model is used to monitor the critical points of future diffusion index changes, providing insights into potential market turning points[34][35] - **Model Construction Process**: The diffusion index is calculated based on the relative price changes of constituent stocks over a specific time window. For example, if all constituent stocks drop by 5% after 5 days, the diffusion index value is 0.33. The current diffusion index value is 0.82, indicating a relatively uniform distribution[34][35] - **Model Evaluation**: The model provides a systematic way to observe market heat and potential upward space, though it is sensitive to the dynamic updates of constituent stocks[34][35] 2. Model Name: First Threshold Method (Left-Side Trading) - **Model Construction Idea**: This method triggers a sell signal when the diffusion index reaches a predefined threshold[39] - **Model Construction Process**: The first threshold method triggered a sell signal on May 8, 2025, when the diffusion index closed at 0.9850[39] 3. Model Name: Delayed Threshold Method (Right-Side Trading) - **Model Construction Idea**: Similar to the first threshold method but with a delayed signal to confirm the trend[41][43] - **Model Construction Process**: The delayed threshold method triggered a sell signal on May 15, 2025, when the diffusion index closed at 0.8975[43] 4. Model Name: Dual Moving Average Method (Adaptive Trading) - **Model Construction Idea**: This method uses two moving averages to adaptively identify trading signals[44] - **Model Construction Process**: The dual moving average method issued a sell signal again on August 4, 2025[44] --- Model Backtesting Results 1. Diffusion Index Model - Current diffusion index value: 0.82[34][35] 2. First Threshold Method - Triggered sell signal at diffusion index value: 0.9850[39] 3. Delayed Threshold Method - Triggered sell signal at diffusion index value: 0.8975[43] 4. Dual Moving Average Method - Triggered sell signal on August 4, 2025[44] --- Quantitative Factors and Construction Methods 1. Factor Name: One-Year Volatility Factor - **Factor Construction Idea**: Measures the stock's price volatility over the past year[3][29] - **Factor Construction Process**: Rank IC for this factor this week is 0.135, with a historical average of -0.032[3][29] 2. Factor Name: Residual Volatility Factor - **Factor Construction Idea**: Captures the residual volatility of stock returns after accounting for market movements[3][29] - **Factor Construction Process**: Rank IC for this factor this week is 0.057, with a historical average of -0.039[3][29] 3. Factor Name: Growth Factor - **Factor Construction Idea**: Reflects the growth potential of stocks based on financial metrics[3][29] - **Factor Construction Process**: Rank IC for this factor this week is 0.053, with a historical average of -0.004[3][29] 4. Factor Name: Leverage Factor - **Factor Construction Idea**: Measures the financial leverage of companies[3][29] - **Factor Construction Process**: Rank IC for this factor this week is 0.042, with a historical average of -0.006[3][29] 5. Factor Name: Illiquidity Factor - **Factor Construction Idea**: Captures the illiquidity of stocks based on trading volume and price impact[3][29] - **Factor Construction Process**: Rank IC for this factor this week is 0.041, with a historical average of 0.04[3][29] 6. Factor Name: 10-Day Return Factor - **Factor Construction Idea**: Measures the stock's return over the past 10 days[3][29] - **Factor Construction Process**: Rank IC for this factor this week is -0.131, with a historical average of -0.061[3][29] 7. Factor Name: Nonlinear Market Cap Factor - **Factor Construction Idea**: Captures the nonlinear relationship between market capitalization and stock returns[3][29] - **Factor Construction Process**: Rank IC for this factor this week is -0.13, with a historical average of -0.033[3][29] 8. Factor Name: Logarithmic Market Cap Factor - **Factor Construction Idea**: Uses the logarithm of market capitalization to explain stock returns[3][29] - **Factor Construction Process**: Rank IC for this factor this week is -0.13, with a historical average of -0.033[3][29] 9. Factor Name: 10-Day Total Market Cap Turnover Factor - **Factor Construction Idea**: Measures the turnover of total market capitalization over the past 10 days[3][29] - **Factor Construction Process**: Rank IC for this factor this week is -0.13, with a historical average of -0.06[3][29] 10. Factor Name: PE_TTM Reciprocal Factor - **Factor Construction Idea**: Uses the reciprocal of the price-to-earnings ratio (trailing twelve months) as a valuation metric[3][29] - **Factor Construction Process**: Rank IC for this factor this week is -0.129, with a historical average of 0.017[3][29] --- Factor Backtesting Results Top 5 Factors by Rank IC This Week 1. One-Year Volatility Factor: 0.135[3][29] 2. Residual Volatility Factor: 0.057[3][29] 3. Growth Factor: 0.053[3][29] 4. Leverage Factor: 0.042[3][29] 5. Illiquidity Factor: 0.041[3][29] Bottom 5 Factors by Rank IC This Week 1. 10-Day Return Factor: -0.131[3][29] 2. Nonlinear Market Cap Factor: -0.13[3][29] 3. Logarithmic Market Cap Factor: -0.13[3][29] 4. 10-Day Total Market Cap Turnover Factor: -0.13[3][29] 5. PE_TTM Reciprocal Factor: -0.129[3][29]

- Model Name: Diffusion Index Model; Model Construction Idea: The model monitors the critical points of future diffusion index changes; Model Construction Process: The model uses a table to monitor the future diffusion index change points. The horizontal axis represents the percentage change in stock prices from the current week, ranging from 1.1 to 0.9, indicating a 10% rise to a 10% fall. The vertical axis represents the length of the review period from the current week, with T ranging from 20 to 10, indicating the number of trading days from the current week, i.e., N from 0 to 10, N=20-T. For example, a horizontal axis value of 0.95 and a vertical axis value of 15 days is 0.21, indicating that if all stocks in the micro-cap index fall by 5% after N=5 days, the value of the micro-cap diffusion index is 0.21. The current value of the diffusion index is 0.76 (horizontal axis 20, vertical axis 1.00) [40][41][42] - Model Name: Initial Threshold Method (Left-Side Trading); Model Construction Idea: The model triggers a short position signal when the diffusion index reaches a certain threshold; Model Construction Process: The initial threshold method triggered a short position signal at the close of May 8, 2025, with a value of 0.9850 [45][46] - Model Name: Delayed Threshold Method (Right-Side Trading); Model Construction Idea: The model triggers a short position signal when the diffusion index reaches a certain threshold; Model Construction Process: The delayed threshold method triggered a short position signal at the close of May 15, 2025, with a value of 0.8975 [47][49] - Model Name: Double Moving Average Method (Adaptive Trading); Model Construction Idea: The model triggers a short position signal when the diffusion index reaches a certain threshold; Model Construction Process: The double moving average method triggered a short position signal at the close of August 4, 2025 [50][51] - Factor Name: Logarithmic Market Value Factor; Factor Construction Idea: The factor ranks stocks based on their logarithmic market value; Factor Construction Process: The factor is calculated by taking the logarithm of the market value of stocks and ranking them accordingly; Factor Evaluation: The factor performed well this week with a rank IC of 0.206, compared to a historical average of -0.033 [4][18][35] - Factor Name: Nonlinear Market Value Factor; Factor Construction Idea: The factor ranks stocks based on their nonlinear market value; Factor Construction Process: The factor is calculated by taking the nonlinear transformation of the market value of stocks and ranking them accordingly; Factor Evaluation: The factor performed well this week with a rank IC of 0.206, compared to a historical average of -0.033 [4][18][35] - Factor Name: Unadjusted Stock Price Factor; Factor Construction Idea: The factor ranks stocks based on their unadjusted stock price; Factor Construction Process: The factor is calculated by taking the unadjusted stock price of stocks and ranking them accordingly; Factor Evaluation: The factor performed well this week with a rank IC of 0.15, compared to a historical average of -0.014 [4][18][35] - Factor Name: Profitability Factor; Factor Construction Idea: The factor ranks stocks based on their profitability; Factor Construction Process: The factor is calculated by taking the profitability metrics of stocks and ranking them accordingly; Factor Evaluation: The factor performed well this week with a rank IC of 0.141, compared to a historical average of 0.022 [4][18][35] - Factor Name: Single Quarter ROE Factor; Factor Construction Idea: The factor ranks stocks based on their single quarter return on equity (ROE); Factor Construction Process: The factor is calculated by taking the single quarter ROE of stocks and ranking them accordingly; Factor Evaluation: The factor performed well this week with a rank IC of 0.137, compared to a historical average of 0.022 [4][18][35] - Diffusion Index Model, Rank IC: 0.76 [40][41][42] - Initial Threshold Method, Rank IC: 0.9850 [45][46] - Delayed Threshold Method, Rank IC: 0.8975 [47][49] - Double Moving Average Method, Rank IC: 0.76 [50][51] - Logarithmic Market Value Factor, Rank IC: 0.206 [4][18][35] - Nonlinear Market Value Factor, Rank IC: 0.206 [4][18][35] - Unadjusted Stock Price Factor, Rank IC: 0.15 [4][18][35] - Profitability Factor, Rank IC: 0.141 [4][18][35] - Single Quarter ROE Factor, Rank IC: 0.137 [4][18][35]

Quantitative Models and Construction Methods Diffusion Index Model - **Model Name**: Diffusion Index Model - **Construction Idea**: The model monitors the relative performance of stocks within the micro-cap index over different time windows to identify potential turning points in market trends [41][42] - **Construction Process**: - The horizontal axis represents the percentage change in stock prices from +10% to -10% (1.1 to 0.9) - The vertical axis represents the length of the review window, ranging from 20 days to 10 days - For example, at horizontal axis 0.95 and vertical axis 15 days, the value of 0.37 indicates that if all stocks in the micro-cap index drop by 5% after 5 days, the diffusion index value is 0.37 - Formula: Diffusion Index = $\frac{\text{Number of stocks outperforming the benchmark}}{\text{Total number of stocks}}$ [41][42] - **Evaluation**: The model effectively identifies market trends but faces challenges when bottom-performing stocks are abandoned during strong upward trends [42] - **Testing Results**: Current diffusion index value is 0.94, indicating a strong upward trend [41][42] Threshold Methods - **Model Name**: Threshold Methods (First Threshold Method and Delayed Threshold Method) - **Construction Idea**: These methods use predefined thresholds to generate trading signals based on the diffusion index [45][49] - **Construction Process**: - First Threshold Method: Triggered a sell signal on May 8, 2025, when the diffusion index reached 0.9850 [45] - Delayed Threshold Method: Triggered a sell signal on May 15, 2025, when the diffusion index reached 0.8975 [49] - **Evaluation**: These methods provide clear trading signals but may lag during rapid market changes [45][49] - **Testing Results**: First Threshold Method value: 0.9850; Delayed Threshold Method value: 0.8975 [45][49] Dual Moving Average Method - **Model Name**: Dual Moving Average Method - **Construction Idea**: This method uses adaptive moving averages to generate trading signals based on market trends [50] - **Construction Process**: - The method compares short-term and long-term moving averages to identify buy or sell signals - On July 3, 2025, the method generated a buy signal [50] - **Evaluation**: The method adapts well to changing market conditions and provides timely signals [50] - **Testing Results**: Buy signal generated on July 3, 2025 [50] --- Quantitative Factors and Construction Methods Top Performing Factors - **Factor Names**: Non-liquidity factor, Unadjusted stock price factor, Beta factor, Standardized expected earnings factor, PE_TTM reciprocal factor [4][19][36] - **Construction Idea**: These factors are derived from stock characteristics and financial metrics to predict future returns [4][19][36] - **Construction Process**: - Non-liquidity factor: Measures the illiquidity of stocks - Unadjusted stock price factor: Uses raw stock prices without adjustments - Beta factor: Captures the sensitivity of stock returns to market movements - Standardized expected earnings factor: Standardizes analysts' earnings forecasts - PE_TTM reciprocal factor: Calculates the reciprocal of the trailing twelve-month price-to-earnings ratio - **Evaluation**: These factors show strong predictive power for stock returns [4][19][36] - **Testing Results**: - Non-liquidity factor IC: 0.353 (historical average: 0.04) - Unadjusted stock price factor IC: 0.348 (historical average: -0.016) - Beta factor IC: 0.247 (historical average: 0.005) - Standardized expected earnings factor IC: 0.141 (historical average: 0.014) - PE_TTM reciprocal factor IC: 0.092 (historical average: 0.017) [4][19][36] Underperforming Factors - **Factor Names**: Turnover factor, 10-day total market capitalization turnover rate factor, Liquidity factor, 10-day free float market capitalization turnover rate factor, Leverage factor [4][19][36] - **Construction Idea**: These factors are derived from trading activity and financial leverage metrics [4][19][36] - **Construction Process**: - Turnover factor: Measures trading volume relative to market capitalization - 10-day total market capitalization turnover rate factor: Calculates turnover rate over a 10-day window - Liquidity factor: Assesses the ease of trading stocks - 10-day free float market capitalization turnover rate factor: Similar to the total turnover rate but focuses on free float shares - Leverage factor: Measures financial leverage of companies - **Evaluation**: These factors exhibit weak predictive power and negative correlations with returns [4][19][36] - **Testing Results**: - Turnover factor IC: -0.336 (historical average: -0.082) - 10-day total market capitalization turnover rate factor IC: -0.286 (historical average: -0.06) - Liquidity factor IC: -0.278 (historical average: -0.041) - 10-day free float market capitalization turnover rate factor IC: -0.276 (historical average: -0.062) - Leverage factor IC: -0.225 (historical average: -0.006) [4][19][36] --- Strategy Performance Small-Cap Low-Volatility 50 Strategy - **Strategy Name**: Small-Cap Low-Volatility 50 Strategy - **Construction Idea**: Selects 50 stocks with small market capitalization and low volatility from the micro-cap index [7][19][37] - **Construction Process**: - Stocks are selected bi-weekly based on market capitalization and volatility criteria - Benchmark: Wind Micro-Cap Index (8841431.WI) - Transaction cost: 0.3% on both sides [7][19][37] - **Evaluation**: The strategy demonstrates strong performance but occasionally underperforms the benchmark [7][19][37] - **Testing Results**: - 2024 return: 7.07% (excess return: -2.93%) - 2025 YTD return: 62.07% (weekly excess return: -2.44%) [7][19][37]