Operating costs - Fixed assets residuals
factor.formula
Operating cost regression model:
in:
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represents the i-th quarter, i ∈ {0, 1, 2, ..., N-1}, represents the quarterly series of the retrospective, where 0 represents the most recent quarter, N represents the total number of retrospective quarters, and the default N = 8. For example, if N = 8, the data is regressed using cross-sectional data from the past 8 quarters.
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The Z-Score standardized value of the total operating cost in the i-th quarter. The Z-Score standardized formula is (X - μ) / σ, where X is the original operating cost, μ is the mean of the operating cost in the past N quarters, and σ is the standard deviation of the operating cost in the past N quarters. The standardized process eliminates the differences in the operating cost values between different companies and time periods.
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The Z-Score standardized value of fixed assets in the i-th quarter. The Z-Score standardized formula is (X - μ) / σ, where X is the original fixed assets, μ is the mean of fixed assets in the past N quarters, and σ is the standard deviation of fixed assets in the past N quarters. Standardization eliminates the differences in fixed asset values between different companies and time periods.
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The intercept term of the regression model represents the expected value of the standardized operating cost when the fixed assets are 0. After Z-Score standardization, the intercept term is generally close to 0.
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The slope of the regression model represents the expected change in standardized operating costs for every unit change in fixed assets, and its size represents the sensitivity of operating costs to fixed assets.
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The regression residual for the i-th quarter. It represents the difference between the actual operating costs and the model predictions at the current level of fixed assets. In particular, when i = 0, its residual value $\epsilon_0$ is the value of this factor.
factor.explanation
The core logic of the operating cost-fixed asset residual factor (OCFA Residual) is to identify the ability of an enterprise to control its operating costs under a given fixed asset investment level. This factor assumes that, with other conditions unchanged, there should be a certain linear relationship between the operating costs of an enterprise and its fixed asset scale. When the actual operating costs of an enterprise deviate significantly from this linear relationship (reflected in the residual), it may mean that the operating efficiency or management ability of the enterprise is abnormal. A positive residual indicates that the operating costs of an enterprise are high under the same fixed asset investment, which may mean inefficiency, poor management, or other abnormal expenses; a negative residual indicates that the operating costs of an enterprise are low under the same fixed asset investment, which may represent higher operating efficiency or better cost control.
This factor is related to the traditional concept of capacity utilization, but it pays more attention to the degree of deviation between the operating costs of an enterprise and the fixed asset investment, rather than simply the fixed asset utilization rate. Through Z-Score standardization, the impact of different enterprise sizes and industry differences is eliminated, making this factor more effective in cross-industry comparisons. The size of the regression residual can be regarded as a quantitative assessment of the operating efficiency of an enterprise and can be applied to quantitative trading strategies.
In addition, the construction of this factor is based on historical data from the past N quarters, which has a certain degree of stability. The selection of quarterly frequency data is also more suitable for reflecting changes in the company's mid- and long-term operating efficiency rather than short-term fluctuations. Through backtesting and analyzing historical residuals, the effectiveness of this factor in predicting future stock returns can be determined.