Relative combination logarithmic spread deviation
factor.formula
Reference price:
The logarithmic price difference between stock i and the reference price:
Relative combination logarithmic spread deviation:
in:
- :
The reference price of stock i at time t is obtained by the equally weighted average of the prices of N stocks with the most similar characteristics.
- :
The price of stock i at time t
- :
The price of the jth similar stock at time t
- :
The logarithmic difference between the price of stock i at time t and its reference price
- :
The mean of the logarithmic differences between stock i and its reference price over a period of time is used to measure the central position of the stock's price spread.
- :
The standard deviation of the logarithmic difference between stock i and its reference price over a period of time is used to measure the volatility of the stock's price difference.
factor.explanation
This factor captures the relative strength of individual stock prices relative to their characteristically similar combinations. When the factor value is low, it means that the price of the individual stock is lower than the average level of its characteristic combination, and it may be undervalued, suggesting potential momentum for price regression in the future. On the contrary, a higher factor value suggests that the price of the individual stock is higher than the average level of its characteristic combination, and there may be a risk of overvaluation, and it may face pressure for price correction in the future. The core idea of this factor is based on the assumption of mean reversion, that is, when the price of an individual stock deviates from its reasonable valuation range (represented by the characteristic combination), there is a tendency to regress to the average level. Therefore, this factor can be used to identify stocks with excessive price fluctuations in the short term and to implement corresponding trading strategies.