Retail Investor Synchronicity Factor
factor.formula
Rank Correlation (R_t, S_{t+1})
in:
- :
Represents the daily return time series of the underlying asset in the past 20 trading days. This series reflects the volatility of market prices in the recent period and is used to measure the overall ups and downs of the market. Specifically, for each trading day, the return is calculated as the percentage change of the closing price of that day relative to the closing price of the previous day. The length of the time window (here is 20 trading days) can be adjusted as needed to adapt to different market conditions and analysis objectives.
- :
Represents the time series of net inflows of small orders (for example, single transaction amounts less than 40,000 yuan) over the past 20 trading days, and rolled forward one trading day (i.e., t+1). Small net inflows reflect the trading behavior of retail investors. Positive values indicate net buying by retail investors, and negative values indicate net selling by retail investors. This series reflects the flow of funds from retail investors in the recent period and can be used to observe whether retail investors are trading in the same direction. The length of the time window (here 20 trading days) can be adjusted as needed. Rolling forward one trading day is intended to observe the predictive power of retail investors' trading behavior on future returns.
factor.explanation
This factor measures the synchronization of retail investors' trading behavior by calculating the rank correlation coefficient between the market return ($R_t$) over the past 20 trading days and the net inflow of small orders ($S_{t+1}$) over the past 20 trading days with a lag of one period. The rank correlation coefficient is a non-parametric correlation measure that can effectively capture the monotonic relationship between variables without assuming that the variables follow a specific distribution. A positive rank correlation coefficient indicates that retail investors' trading behavior is positively correlated with the market return, that is, retail investors tend to buy when the market rises and sell when the market falls, indicating that there is a strong "chasing up and selling down" behavior. Conversely, a negative rank correlation coefficient indicates that retail investors' trading behavior is negatively correlated with market returns. This factor is negatively correlated with future stock returns, indicating that the collective trading behavior of retail investors may lead to short-term fluctuations in stock prices, but in the long run, this chasing up and selling down behavior is often associated with negative returns. This phenomenon is called "retail investor herding effect" or "retail investor synchronization" in behavioral finance. Therefore, this factor can be used as an indicator to measure market sentiment and predict future returns. The higher the value of this factor, the stronger the synchronization of retail investors and the worse the expected future returns.