Market reaction is delayed
factor.formula
Market return regression model:
Market reaction is delayed:
in:
- :
The return of stock i in period t is usually calculated using logarithmic return.
- :
The overall market return in period t is usually the return of a representative market index (such as the CSI 300, S&P 500).
- :
The overall market return with a lag of k. The lag period k can be adjusted according to the specific situation and is usually 1 to 5 trading days.
- :
The upper limit of the lag period determines the maximum length of the market lag effect that needs to be considered. Usually the value is 3 or 5, which means that the lag effect of up to 3 or 5 trading days is considered.
- :
The regression intercept term for stock i represents the portion of stock i’s return that is unrelated to the market.
- :
The exposure of stock i to market risk measures the impact of changes in market returns on the return of stock i.
- :
The coefficient of the impact of the market return with a lag of k periods on the return of stock i measures the impact of the lag effect of market returns on the returns of individual stocks.
- :
The regression residual of stock i in period t represents the volatility of stock returns that cannot be explained by the model.
- :
The goodness of fit (R-squared value) of the regression model when the coefficients of all market lag terms in the regression model are forced to 0. This means that the model only considers the impact of the current market return on individual stocks.
- :
Goodness of fit (R-squared) of the full regression model including current and lagged market returns.
factor.explanation
The market reaction lag factor measures the timeliness of the response of individual stock prices to overall market information. The larger the value of this factor, the slower the response of individual stock prices to market information, and the more likely it is to be affected by non-market factors. Investors may pay too much attention to information at the individual stock level, which may lead to overvaluation or undervaluation of stock prices. The closer the factor value is to 0, the more timely the individual stock price responds to market information, and the closer it is to 1, the slower the response. A high market reaction lag factor usually indicates higher speculative risk and potential pricing bias, and can be used to build risk prediction and quantitative stock selection models.