Negative extreme return
factor.formula
Minimum Daily Return = -min(R_1, R_2, ..., R_K)
The formula means taking the minimum value and then taking the negative value in the daily yield sequence of the last K months. R_1, R_2, ..., R_K represent the daily yields of the last K months.
- :
The stock return rate on the ith trading day. The calculation method of the return rate can be defined as needed (for example, simple return rate, logarithmic return rate).
- :
The length of the lookback period, i.e. the number of months of the daily return series used to calculate the minimum.
factor.explanation
This factor measures the downside risk of a stock by capturing its worst daily return in the recent period. The logic behind it is: if the return distribution of a stock is negatively skewed, then the stock is more likely to have extreme negative returns in the short term. Therefore, stocks with high negative extreme returns may also have relatively high downside risk and tail risk. This factor can be used for:
- Risk management: Identify stocks with higher downside risk and assist in building risk control strategies.
- Yield reversal strategy: Extreme negative returns are often accompanied by opportunities for rebounds, and this factor can be used as a reference signal for yield reversal strategies.
- Behavioral finance research: Examine investors' reactions to extreme negative returns and the impact of skewed preferences on stock pricing.
In contrast to the "maximum return" factor, this factor focuses on negative extreme returns. In academic research, negative extreme returns are often used to test whether investors require higher expected returns for negatively skewed stocks.