Alpha_1 Discussion - kitzz03/WorldQuant-Alphas GitHub Wiki
Rapid Information Flow: High trade volume stocks are often more closely followed by analysts, institutional investors, and the media. This means that information about these stocks is disseminated and reflected in prices more quickly.
Market Reactions: Volatile stocks tend to have more exaggerated market reactions to news and earnings reports. When these stocks report earnings or sales that deviate significantly from expectations, their prices move more dramatically compared to less volatile stocks. The alpha factor you use, which relies on the ranking of fundamental metrics, is better at capturing these sharp movements and translating them into profitable signals.
Alpha
b=open;
a = (1+rank(ts_rank(est_epsr/b,60)))*(1+rank(ts_rank(est_sales/sharesout,60)));
group = bucket(rank(cap), range = "0.1667,1,0.1667");
group_rank(group_neutralize(a,group),group)
Hypothesis
Using comparision of estimated earnings per share over the past quarter for a stock by itself we go long on the ones having better values than before.
Datasets used:
1 est_epsr : Estimated earning per share
2 est_sales : Estimated sales
3 sharesout : No. of shares
Initial Alpha
b=open; a = (rank(ts_rank(est_epsr/b,60))); a
Using comparision of estimated earnings per share over the past quater for a stock by itself we decide to take long positions on alphas which perform better . We divided our per share value with the price of stock in that day to make it represent the profit of a firm. We chose open value as the price of the stock so it can react to the most recent updates in the market as we trading in D0 market. At the end use rank operator to cross-sectionally rank the stocks .
We see that the alpha shoots up lately but is not at very good initially. We need to do something to stabilize it initial phase.
Improved Alpha
b=open;
a = (1+rank(ts_rank(est_epsr/b,60)))*(1+rank(ts_rank(est_sales/sharesout,60)));
group = bucket(rank(cap), range = "0.1667,1,0.1667");
group_rank(group_neutralize(a,group),group)
As earnings and sales together go in hand in hand we tried to combine them by multiplying their per share value to indicate a better view of company and stabalize the signal in initial part. Also as we had 2 ranks multipilied in our alpha we did (1+ rank) for better scalability and issues like multiplication with 0. We used cap gfor custom neutralization and used group_rank to finally rank them cross-sectionally Then using group_rank for ranking as well as to remove outliers that might generate due to combination of datasets.
Answers to questions by judges:
Reason for industry neutralization? As analyst data represents fututre prediction of fundamental values we used industry neutralization( Learning from brain plat form).
if you dont find answer to a specific question add the question and leave it blank, we will discuss together. 1 What can be reason for alpha performing bad in initial implementation?
2 Whys is rank(cap) used
Links:
links to sources research papers articles news etc.
Backstory:
(optional)
some quote
something related to chess
some book
Further scope of improvement:
================================================================================ low turnover because of using fundamental data which is generated quaterly as seen from the turnover chart having spikes at regular intervals
"Birds of same feather flock together" - group neutralize
https://www.investopedia.com/terms/o/outstandingshares.asp
The term outstanding shares refers to a company's stock currently held by all its shareholders. Outstanding shares include share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. These shares appear on a company’s balance sheet under Capital Stock. A company's number of outstanding shares is not static and may fluctuate wildly over time. Outstanding shares are used to calculate key metrics for companies.
As noted above, a company's outstanding shares are those that are held by its shareholders. Any authorized shares that are held by or sold to a corporation’s shareholders, exclusive of treasury stock which is held by the company itself, are known as outstanding shares.1 Cornell University, Legal Information Institute. "Outstanding Stock."
Put simply, the number of shares outstanding represents the amount of stock on the open market, including those held by:
Individual investors Institutional investors Restricted shares held by insiders and company officers If a company considers its stock to be undervalued, it has the option to institute a repurchase program. In this case, it buys back shares of its own stock. In an effort to increase the market value of remaining shares and elevate overall earnings per share, the company may reduce the number of shares outstanding by repurchasing or buying back those shares, thus taking them off the open market.
In addition to listing outstanding shares or capital stock on the company’s balance sheet
Also referred to as the statement of financial position, a company's balance sheet provides information on what the company is worth from a book value perspective.
A company's income statement provides details on the revenue a company earns and the expenses involved in its operating activities.
The cash flow statement provides a view of a company’s overall liquidity by showing cash transaction activities.
https://www.wallstreetprep.com/knowledge/how-are-the-three-financial-statements-linked/
The Income Statement A company's income statement provides details on the revenue a company earns and the expenses involved in its operating activities. Overall, it provides more granular detail on the holistic operating activities of a company. Broadly, the income statement shows the direct, indirect, and capital expenses a company incurs.
Starting with direct, the top line reports the level of revenue a company earned over a specific time frame. It then shows the expenses directly related to earning that revenue. Direct expenses are generally grouped into cost of goods sold or cost of sales, which represents direct wholesale costs. Costs of sales are subtracted from revenue to arrive at gross profit. Gross profit is then often analyzed in comparison to total sales to identify a company’s gross profit margin.
Indirect expenses are also an important part of the income statement. Indirect expenses form a second category and show all costs indirectly associated with the revenue-generating activities of a firm. These costs can include salaries, general and administrative expenses, research and development, and depreciation and amortization. Together these indirect expenses are subtracted from gross profit to identify operating income.
The final category on the income statement factors in capital expenses. The last expenses to be considered here include interest, tax, and extraordinary items. The subtraction of these items results in the bottom line net income or the total amount of earnings a company has achieved.
Offering a great deal of transparency on the company’s operating activities, the income statement is also a key driver of the company’s other two financial statements. Net income at the end of a period becomes part of the company’s stockholders' equity as retained earnings. Net income is also carried over to the cash flow statement where it serves as the top line item for operating activities. Sales booked during the period are also added to the company’s short-term assets as accounts receivable.
On the income statement, analysts will typically be looking at a company’s profitability. Therefore, key ratios used for analyzing the income statement include gross margin, operating margin, and net margin as well as tax ratio efficiency and interest coverage. Amortization is the practice of spreading an intangible asset's cost over that asset's useful life. Depreciation is the expensing a fixed asset as it is used to reflect its anticipated deterioration. Examples of intangible assets that are expensed through amortization include patents, trademarks, franchise agreements, copyrights, costs of issuing bonds to raise capital, and organizational costs. Some examples of fixed or tangible assets that are commonly depreciated include buildings, equipment, office furniture, vehicles, and machinery. 4
Unlike intangible assets, tangible assets may have some value when the business no longer has a use for them. For this reason, depreciation is calculated by subtracting the asset's salvage value or resale value from its original cost. The difference is depreciated evenly over the years of the expected life of the asset. In other words, the depreciated amount expensed in each year is a tax deduction for the company until the useful life of the asset has expired.
Weighted Average of Outstanding Shares Since the number of outstanding shares is incorporated into key calculations of financial metrics such as earnings per share and because this number is so subject to variation over time, the weighted average of outstanding shares is often used in its stead in certain formulae.
For example, say a company with 100,000 shares outstanding decides to perform a stock split, thus increasing the total amount of shares outstanding to 200,000. The company later reports earnings of $200,000. To calculate earnings per share for the overall inclusive time period, the formula would be as follows:
(Net Income - Dividends on Preferred Stock (200,000)) ÷ Outstanding Shares (100,000 - 200,000) But it remains unclear which of the two variant outstanding share values to incorporate into the equation: 100,000 or 200,000. The former would result in an EPS of $1, while the latter would result in an EPS of $2. In order to account for this inevitable variation, financial calculations can more accurately employ the weighted average of outstanding shares, which is figured as follows:
(Outstanding Shares x Reporting Period A) + (Outstanding Shares x Reporting Period B) In the above example, if the reporting periods were each half of a year, the resulting weighted average of outstanding shares would be equal to 150,000. Thus, in revisiting the EPS calculation, $200,000 divided by the 150,000 weighted average of outstanding shares would equal $1.33 in earnings per share.
Earnings per share (EPS) is a measure of a company's profitability that indicates how much profit each outstanding share of common stock has earned. It's calculated by dividing the company's net income by the total number of outstanding shares.
Like other financial metrics, earnings per share is most valuable when compared against competitor metrics, companies of the same industry, or across a period of time.
In general business operations, sales refer to any transactions where money or value is exchanged for the ownership of a good or entitlement to a service. In an accounting context, sales refers to a company's revenue earned from the sales of products or services (net sales).
https://www.investopedia.com/ask/answers/122214/what-difference-between-revenue-and-sales.asp
Such sources are dividends, rent, fees, donations, royalty, the sale of old assets, interest, etc. Whenever income or revenue is obtained from the normal tasks activities or operations (essential exercises) of business, it is known as sales income (working income). Then again, income from different sources is called non-working income or non-operating revenue.
Income can be different for the services and products industry; for example, an assembling firm will procure the greatest piece of its income from the offer or sale of products. Conversely, service delivering firms like a beauty parlour will get the most extreme piece of their income from conveying administrations to clients.
Market Reactions: Volatile stocks tend to have more exaggerated market reactions to news and earnings reports. When these stocks report earnings or sales that deviate significantly from expectations, their prices move more dramatically compared to less volatile stocks. The alpha factor you use, which relies on the ranking of fundamental metrics, is better at capturing these sharp movements and translating them into profitable signals. You Rapid Information Flow: High trade volume stocks are often more closely followed by analysts, institutional investors, and the media. This means that information about these stocks is disseminated and reflected in prices more quickly.
Example Scenarios Company A: Tech Company
GAAP Earnings: $50 million Non-GAAP Adjustments: Exclude $5 million in stock-based compensation. Exclude $3 million in restructuring charges. Non-GAAP Earnings: $58 million Company B: Manufacturing Firm
GAAP Earnings: $30 million Non-GAAP Adjustments: Exclude $2 million in depreciation and amortization. Exclude $4 million in litigation settlement costs. Non-GAAP Earnings: $36 million Company C: Retail Chain
GAAP Earnings: $20 million Non-GAAP Adjustme Company C: Retail Chain
GAAP Earnings: $20 million Non-GAAP Adjustments: Exclude $1 million in asset write-downs. Exclude $2 million in acquisition-related costs. Exclude $3 million from a one-time gain on the sale of a property. Non-GAAP Earnings: $26 million
why initial signal is performing late?