Analyst Coverage Residuals
factor.formula
Analyst coverage residual calculation formula:
in:
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is the analyst coverage of the ith stock at the end of the mth month, usually using the total number of analysts covering the stock.
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is the total market value of the i-th stock at the end of the m-th month. The formula here uses its logarithmic form, that is, $\ln(SIZE_{i,m})$. The total market value usually refers to the circulating market value to avoid market value fluctuations caused by changes in the equity structure.
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is the average daily turnover rate of the i-th stock in the past three months up to the end of the m-th month. The formula here uses its logarithmic form, that is, $\ln(LNTO_{i,m})$. The turnover rate can reflect the activity of the stock. In order to improve the stability of the data, the average daily turnover rate is usually calculated and the logarithm is calculated.
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It is the cumulative return of the i-th stock in the past three months up to the end of the m-th month, reflecting the short-term momentum effect of the stock.
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is the regression residual, that is, the analyst coverage residual defined by this factor, reflecting the analyst coverage that cannot be explained by market value, turnover rate, and momentum.
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The intercept term of the regression model
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It is the regression coefficient of the logarithm of total market value on the logarithm of analyst coverage, reflecting the impact of market value on analyst coverage.
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It is the regression coefficient of the logarithm of the average daily turnover rate in the past three months on the logarithm of analyst coverage, reflecting the impact of turnover rate on analyst coverage.
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It is the regression coefficient of the return in the past three months on the logarithm of analyst coverage, reflecting the impact of the momentum effect on analyst coverage.
factor.explanation
Analyst coverage is often considered an indicator of market attention, but it is not entirely driven by fundamentals. This factor decomposes analyst coverage into two parts: one is the "expected" coverage that can be explained by fundamental factors such as market capitalization, turnover rate and momentum; the other is the "residual" coverage that cannot be explained by these factors. The residual term is more able to reflect the subjective selectivity of analysts and possible behavioral biases such as herding effects. Studies have shown that there is a significant positive correlation between residual coverage and the excess returns of stocks. Therefore, this factor can be regarded as a valuable stock selection signal.