Size-adjusted ROE residual
factor.formula
Size-adjusted ROE residual:
Among them, $\hat{ROE}_{t}$ is obtained through OLS regression:
In the formula:
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The rolling return on equity (TTM) for the tth period is calculated by dividing the total net profit of the past 12 months by shareholders' equity.
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Total assets in period t. Annual reports use current data, while other quarterly reports use annual report data from the previous year. This is done to eliminate the interference of asset size fluctuations caused by different reporting frequencies on the regression results.
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The residual term of the tth period obtained by ordinary least squares (OLS) regression represents the difference between the actual return on equity and the return on equity predicted based on the total asset size. This residual value can be understood as the excess return on equity actually shown by the enterprise after controlling for the asset size effect.
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The intercept term of the OLS regression model represents the expected return on equity when total assets are zero.
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The slope term of the OLS regression model represents the expected change in return on equity when total assets increase by one unit. This value reflects the sensitivity of asset size to return on equity.
factor.explanation
The scale-adjusted ROE residual reflects the company's true endogenous profitability and operating efficiency more accurately by stripping away the impact of asset size. A positive residual value indicates that the company can create higher-than-expected profitability at a given scale, while a negative residual value indicates that profitability is lower than expected. This factor can effectively identify companies with excess profitability and provide a valuable reference for quantitative investment. Using rolling ROE (TTM) can more smoothly reflect the company's profit trend and reduce the volatility caused by single quarter data.