I recently read an article titled "Hidden Champions in A-shares" (Author: Chushan Jun), and gained a lot from it. Based on the CCI factor, this article conducts a quantitative investment analysis on the hidden champion stocks listed by Chushan Jun. The analysis is as follows:
- Compare the returns of champion stocks based on PE ratio and CCI factor to verify the effectiveness of the CCI factor in predicting the returns of champion stocks.
- Compare the returns of champion stocks and the Shanghai and Shenzhen 300 Index based on the CCI factor to verify the excess returns of champion stocks compared to the index.
Based on the above analysis, using the JoinQuant platform, empirical analysis is conducted through historical backtesting. The parameter settings and global settings for backtesting are as follows:
- Investment amount: 1 million
- Backtesting period: January 1, 2019 - March 31, 2020
- Commission: 0.03% (both sides, minimum 5 yuan), stamp duty: 0.1% (one side)
- Slippage: 0.02 yuan
- Filtering criteria: Exclude ST stocks, suspended stocks, delisted stocks
- Rebalancing frequency: Daily
- Buying method: Equal-weighted buying
- Selling stocks to be bought: No
- Benchmark return: Shanghai and Shenzhen 300 Index
1. Holding champion stocks in ascending order of PE ratio#
Arrange the champion stocks (about 60 stocks) in ascending order of dynamic PE ratio, and select the top 12 stocks (top 20%) as the buying targets for rebalancing. The backtesting results are as follows:
From the above backtesting results, it can be seen that simply buying champion stocks did not generate excess returns in 2019, and the returns were lower than buying the Shanghai and Shenzhen 300 Index. Although champion stocks showed some resistance to the market downturn during the COVID-19 pandemic in 2020, their decline was still significant. As Chushan Jun himself stated,
"Knowing about hidden champions does not mean blindly buying. For hidden champions, especially cyclical hidden champions, we need to pay attention to investment opportunities in growth cyclical stocks and seize the timing."
2. Introduction of CCI factor#
We try to introduce the CCI factor (CCI20) to see if it can change the above results. Let's first analyze the characteristics of the CCI factor for the Shanghai and Shenzhen 300 Index (factor value range: January 1, 2019 - December 31, 2019).
Table 1: CCI factor 1-5 quantiles for the Shanghai and Shenzhen 300 Index
Figure 1: Returns of CCI factor 1-5 quantiles for the Shanghai and Shenzhen 300 Index (rebalancing periods: 1 day, 5 days, 10 days, 22 days)
Table 2: Turnover rate of CCI factor 1-5 quantiles for the Shanghai and Shenzhen 300 Index
From Figure 1 and Table 2, it can be observed that:
- The returns of the CCI factor are positively correlated with the factor values. The higher the factor value, the higher the returns.
- The returns of the CCI factor are inversely related to the rebalancing period. The shorter the rebalancing period, the higher the returns.
- The turnover rate of the CCI factor is high in the middle quantiles and low in the extreme quantiles. The shorter the rebalancing period, the lower the turnover rate, and the longer the rebalancing period, the higher the turnover rate.
Based on the above analysis, the CCI factor for the Shanghai and Shenzhen 300 Index should be selected as the 5th quantile (top 60 stocks with the highest CCI values), and the optimal rebalancing period is 1 day. Based on this, a quantitative trading strategy is constructed, and the backtesting results are as follows:
From the above backtesting results, it can be seen that the CCI-based Shanghai and Shenzhen 300 investment strategy, similar to simply buying champion stocks, did not generate excess returns.
3. Holding champion stocks based on CCI#
Now let's discuss the combination of the above two approaches: stock selection using champion stocks and timing using CCI.
First, let's take a look at the characteristics of the CCI factor for champion stocks (factor value range: January 1, 2019 - December 31, 2019).
Table 3: CCI factor 1-5 quantiles for champion stocks
Figure 2: Returns of CCI factor 1-5 quantiles for champion stocks (rebalancing periods: 1 day, 5 days, 10 days, 22 days)
Table 4: Turnover rate of CCI factor 1-5 quantiles for champion stocks
From Figure 2 and Table 4, it can be observed that:
- The returns of the CCI factor for champion stocks are positively correlated with the factor values. The higher the factor value, the higher the returns. However, compared to the Shanghai and Shenzhen 300 Index, the trend is not as obvious. But for each quantile, the returns of champion stocks are higher than the index.
- The returns of the CCI factor for champion stocks are inversely related to the rebalancing period. The shorter the rebalancing period, the higher the returns. This is especially true for the 5th quantile, where champion stocks and the Shanghai and Shenzhen 300 Index perform exactly the same.
- The turnover rate of the CCI factor for champion stocks is high in the middle quantiles and low in the extreme quantiles. The shorter the rebalancing period, the lower the turnover rate, and the longer the rebalancing period, the higher the turnover rate. This is similar to the Shanghai and Shenzhen 300 Index.
Based on the above results, it can be inferred that during the period from January 1, 2019 to December 31, 2019, if champion stocks are selected from the 5th quantile (top 12 stocks with the highest CCI values) and the rebalancing period is 1 day, their returns should be higher than the Shanghai and Shenzhen 300 Index. Based on this, a quantitative trading strategy is constructed, and the backtesting results are as follows:
From the above backtesting results, it can be seen that the CCI-based champion stocks generated excess returns in 2019, but during the COVID-19 pandemic in 2020, this proactive factor performed similarly to passively buying the Shanghai and Shenzhen 300 Index. It seems that when the nest is overturned, there are no intact eggs.
4. Conclusion#
- The CCI factor was effective for champion stocks in 2019, helping them achieve excess returns. However, it was ineffective in 2020 and only resulted in more losses.
- Compared to the Shanghai and Shenzhen 300 Index, under the same CCI factor, champion stocks generated higher returns than the index in 2019. In 2020, the performance of champion stocks and the index was almost the same.
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