Market-neutral turnover rate residual
factor.formula
Cross-sectional regression model:
Here, the regression model is used to perform a cross-sectional regression on all stocks at each time point t:
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The natural logarithm of the monthly average daily turnover rate of stock i at time t. The turnover rate is defined as the percentage of the stock's trading volume to the total stock in circulation during a specified time period. The logarithm is taken here to alleviate the skewed distribution of the turnover rate.
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The natural logarithm of the market capitalization of stock i at time t. Market capitalization is the product of the number of outstanding shares of a stock multiplied by the current share price. The logarithm is taken to mitigate the skewed distribution of market capitalization data while taking into account the possible nonlinear relationship between market capitalization and turnover rate.
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In the cross-sectional regression at time t, the intercept term of the regression model represents a theoretical value of the logarithm of the turnover rate when the market value is zero.
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In the cross-sectional regression at time t, the regression coefficient of the logarithm of the circulating market value (\ln(MktValue_{i,t})) represents the degree of influence of the market value on the logarithm of the turnover rate.
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The regression residual of stock i at time t represents the turnover rate component after excluding the influence of market capitalization factors, which is the market capitalization-neutral turnover rate residual that we are concerned about.
factor.explanation
The turnover rate of a stock usually shows a certain correlation with the market value of the stock. Usually, the turnover rate of small-cap stocks fluctuates more. This factor removes the linear effect of market value factors on turnover rate through cross-sectional regression, and the residual part (\epsilon_{i,t}) obtained is the turnover rate information that is unrelated to market value. This residual part can reflect the market's non-market value driven liquidity preference for individual stocks, that is, the market's willingness to turn over the stock given the market value. Empirical studies have shown that this factor performs well on the long side, which may reflect investors' preference for stocks with high turnover rate residuals, thereby generating alpha returns.