Financial Similarity Weighted Return Momentum
factor.formula
Financial Similarity Weighted Return Momentum Factor (F-Moment):
The financial correlation (F-link) between companies i and j at time t:
in:
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represents the financial similarity-weighted earnings momentum factor value of company i at time t.
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is the financial correlation between companies i and j at time t, calculated using cosine similarity, which measures the similarity between the two companies in terms of financial indicators. The higher the value, the more similar the financial structures of the two companies are.
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is the standardized value of the kth financial factor of company i at time t. Here, k covers 10 screened low-correlation financial factors, which come from four dimensions: debt-paying ability, operating ability, profitability, and enterprise development ability, such as asset-liability ratio, inventory turnover rate, net profit margin, revenue growth rate, etc. Through standardization (such as z-score standardization), factors of different dimensions are ensured to be comparable.
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It represents the monthly return of company j at time t. It can be arithmetic return or log return, but it must be consistent. This return is used to measure the stock performance of company j in that month.
factor.explanation
The calculation core of the financial similarity weighted return momentum factor is to first construct a weight matrix based on the similarity of financial data, and then weighted sum the monthly returns of each company. The denominator of the formula is to normalize the similarity weights to make the final factor value more comparable. In order to eliminate the monthly reversal effect that may exist in the return data, the generated factor is usually orthogonalized to the monthly return. This factor reflects the synergistic effect of companies with similar financial structures on stock returns, that is, companies with similar financial fundamentals may also have synchronization or mutual influence in their stock price fluctuations. This factor has potential stock selection value.