Quantitative Models and Construction Methods 1. Model Name: Diffusion Index Model - **Model Construction Idea**: The model is used to monitor the critical points of trend changes in the micro-cap stock index by analyzing the distribution of stock price movements over a specific time window [5][39] - **Model Construction Process**: The diffusion index is calculated based on the relative price changes of constituent stocks over a retrospective or forward-looking window. For example, if the horizontal axis is 0.95 and the vertical axis is 15 days, the value of 0.31 indicates that if all constituent stocks drop by 5% after 5 days, the diffusion index value is 0.31. The model uses thresholds to signal trading actions: - **First Threshold Method (Left-Side Trading)**: Triggered a sell signal on May 8, 2025, when the index reached 0.9850 [43] - **Delayed Threshold Method (Right-Side Trading)**: Triggered a sell signal on May 15, 2025, at 0.8975 [47] - **Double Moving Average Method (Adaptive Trading)**: Triggered a buy signal on July 3, 2025 [48] - **Model Evaluation**: The model effectively identifies trend changes but may be influenced by the distribution of constituent stocks and their updates [39][40] 2. Model Name: Small-Cap Low-Volatility 50 Strategy - **Model Construction Idea**: This strategy selects 50 stocks with small market capitalization and low volatility from the micro-cap stock index, rebalancing every two weeks [7][36] - **Model Construction Process**: - Select stocks with the smallest market capitalization and lowest volatility from the micro-cap index - Rebalance the portfolio bi-weekly - Benchmark: Wind Micro-Cap Stock Index (8841431.WI) - Transaction cost: 0.3% on both sides [7][36] - **Model Evaluation**: The strategy demonstrates strong performance in 2025 but underperformed in 2024, indicating sensitivity to market conditions [7][36] --- Model Backtesting Results 1. Diffusion Index Model - **First Threshold Method**: Triggered sell signal at 0.9850 on May 8, 2025 [43] - **Delayed Threshold Method**: Triggered sell signal at 0.8975 on May 15, 2025 [47] - **Double Moving Average Method**: Triggered buy signal on July 3, 2025 [48] 2. Small-Cap Low-Volatility 50 Strategy - **2024 Return**: 7.07%, underperformed by -2.93% relative to the benchmark [7][36] - **2025 YTD Return**: 69.79%, underperformed by -1.88% relative to the benchmark [7][36] --- Quantitative Factors and Construction Methods 1. Factor Name: Unadjusted Stock Price Factor - **Factor Construction Idea**: Measures the rank IC of unadjusted stock prices within the micro-cap stock index [4][17] - **Factor Construction Process**: - Calculate the rank IC of unadjusted stock prices weekly - Compare with historical averages for evaluation [4][17] - **Factor Evaluation**: Demonstrated strong performance this week with a rank IC of 0.177, significantly above the historical average of -0.015 [4][17] 2. Factor Name: Beta Factor - **Factor Construction Idea**: Measures the systematic risk of stocks within the micro-cap stock index [4][17] - **Factor Construction Process**: - Calculate the beta of each stock relative to the market - Evaluate weekly rank IC and compare with historical averages [4][17] - **Factor Evaluation**: Performed well this week with a rank IC of 0.15, above the historical average of 0.006 [4][17] 3. Factor Name: Illiquidity Factor - **Factor Construction Idea**: Captures the illiquidity of stocks within the micro-cap stock index [4][17] - **Factor Construction Process**: - Measure illiquidity based on trading volume and price impact - Evaluate weekly rank IC and compare with historical averages [4][17] - **Factor Evaluation**: Strong performance this week with a rank IC of 0.143, above the historical average of 0.04 [4][17] 4. Factor Name: 10-Day Return Factor - **Factor Construction Idea**: Tracks the short-term momentum of stocks within the micro-cap stock index [4][17] - **Factor Construction Process**: - Calculate the 10-day return for each stock - Evaluate weekly rank IC and compare with historical averages [4][17] - **Factor Evaluation**: Positive performance this week with a rank IC of 0.105, above the historical average of -0.061 [4][17] 5. Factor Name: PE_TTM Reciprocal Factor - **Factor Construction Idea**: Measures valuation based on the reciprocal of the trailing twelve-month price-to-earnings ratio [4][17] - **Factor Construction Process**: - Calculate the reciprocal of PE_TTM for each stock - Evaluate weekly rank IC and compare with historical averages [4][17] - **Factor Evaluation**: Moderate performance this week with a rank IC of 0.041, above the historical average of 0.017 [4][17] --- Factor Backtesting Results Top 5 Factors by Weekly Rank IC 1. **Unadjusted Stock Price Factor**: Weekly rank IC = 0.177, Historical Average = -0.015 [4][17] 2. **Beta Factor**: Weekly rank IC = 0.15, Historical Average = 0.006 [4][17] 3. **Illiquidity Factor**: Weekly rank IC = 0.143, Historical Average = 0.04 [4][17] 4. **10-Day Return Factor**: Weekly rank IC = 0.105, Historical Average = -0.061 [4][17] 5. **PE_TTM Reciprocal Factor**: Weekly rank IC = 0.041, Historical Average = 0.017 [4][17] Bottom 5 Factors by Weekly Rank IC 1. **Turnover Factor**: Weekly rank IC = -0.189, Historical Average = -0.082 [4][17] 2. **Momentum Factor**: Weekly rank IC = -0.132, Historical Average = -0.005 [4][17] 3. **Residual Volatility Factor**: Weekly rank IC = -0.13, Historical Average = -0.04 [4][17] 4. **10-Day Free Float Turnover Factor**: Weekly rank IC = -0.12, Historical Average = -0.062 [4][17] 5. **Liquidity Factor**: Weekly rank IC = -0.118, Historical Average = -0.041 [4][17]

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]