Residual market value deviation
factor.formula
The market value explanation model is as follows:
in:
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is the logarithmic market value of company i at time t, calculated as ln(total market value of the company). It is the result of logarithmic transformation of the market value. The purpose is to reduce the skewness of the market value distribution and make it more consistent with the normal distribution, which is conducive to regression analysis.
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is the dummy variable of the industry to which company i belongs at time t, which is used to control the impact of industry-level characteristics on market value. For example, if CITIC's first-level industry classification is used, there are 30 dummy variables. The dummy variable method can eliminate the impact of the overall industry valuation level on individual stocks, making the regression analysis more accurate.
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is the logarithmic net assets of company i at time t, calculated as ln(company net assets). Similar to the logarithmic market value, logarithmic transformation of net assets can reduce the skewness of its distribution and better reflect that the marginal impact of net assets on market value is decreasing.
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is the positive net profit of company i at time t. When the net profit is positive, it is the net profit value; when the net profit is negative, it is 0. Take the logarithm and add it to the regression model. This processing method makes the impact of positive profit on market value more linear, avoiding the nonlinear problem that may exist when directly using the overall net profit. It can also distinguish the different effects of positive and negative profits on market value.
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is the absolute value of the negative net profit of company i at time t. When the net profit is negative, it is the absolute value of the net profit; when the net profit is positive, the value is 0. Take the logarithm and add it to the regression model. This treatment is similar to $NI^+_{it}$, which is to distinguish the different effects of negative earnings on market value, and make the effect of negative earnings on market value more linear by taking the logarithm.
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is the leverage ratio of company i at time t, which can be measured by debt-to-asset ratio or a more sophisticated financial leverage indicator. The leverage ratio reflects the capital structure and financial risk of a company and is one of the important factors affecting the company's market value.
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is the residual term of the above cross-sectional regression model, representing the deviation between the actual market value of company i at time t and the market value predicted by its regression model, that is, the residual market value deviation, also known as the idiosyncratic market value. A positive residual indicates that the company is overvalued, and a negative residual indicates that the company is undervalued. This residual captures the market's specific pricing of the company's value, which is not entirely determined by fundamental factors.
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They are the coefficients of the cross-sectional regression model respectively. The specific values may be different in different time sections (t) and different industries (j) and are obtained through regression.
factor.explanation
The residual market value deviation factor is based on a cross-sectional regression model that attempts to explain the company's market value with fundamental factors such as industry, net assets, net profit and leverage ratio. The residual term of the model regression represents the part of the current market value that cannot be explained by these fundamental factors, reflecting the irrational pricing or special information of the market. The higher the factor value (i.e., the residual term), the more the company's current market value is overestimated relative to its intrinsic value, and future stock returns may face downward pressure. Conversely, the lower the factor value, the more likely it is to be underestimated, and the stock price may have room to rise in the future. This factor can assist investors in identifying value mismatch opportunities in the market and make investment decisions by taking advantage of market sentiment and irrational pricing. It should be emphasized that the effectiveness of this factor may be affected by the market stage and sentiment, and it needs to be used in combination with other factors and dynamically tracked and adjusted.