A Quantitative Strategy for value investing in Small Cap Stocks Based on Positive Feedback Asymmetry

Abstract

Significant positive feedback trading exists in the Chinese market, and there is a significant difference between the extent of chasing up and killing down in the context of positive feedback trading. The purpose of this paper is to investigate whether a quantitative investment strategy with this asymmetric trait as the core factor can achieve significant excess returns and reduce the risk impact of irrational investors in the market. This paper is based on the CSI 500 index represented by small-cap stocks as the strategic stock pool, and further constructs a quantitative stock selection strategy, which firstly estimates the positive feedback trading asymmetry index of individual stocks in the market through the framework of SW, and at the same time, combines the Chinese three-factor model with Amihud's illiquidity index to construct the factor portfolios, and conducts a validity test to ultimately select the four portfolios with the highest cumulative returns as factor portfolios. This paper concludes that the strategy has a return of 316.73% during the back testing period, a weekly Sharpe ratio of 0.33, and a maximum backtest of 36.41%, realizing a significant excess return with controlled risk.