Tail Liquidity Premium Factor
Hypothesis
During periods of market stress, small-cap or low-liquidity stocks often experience excessive discounting due to concentrated selling by investors, yet they tend to exhibit stronger subsequent rebounds compared to large-cap stocks—manifesting a "tail liquidity premium." This phenomenon stems from institutional aversion to liquidity risk and retail-driven irrational trading under extreme sentiment, creating short-term mispricing that offers opportunities for contrarian strategies.
Implementation
Using daily trading data from the past 20 days, select the bottom 10% of stocks by turnover ratio across the market. Compute the volatility of their excess returns relative to industry averages. The final factor score is the product of this volatility and the magnitude of recent price drawdown, designed to identify oversold tail assets with rebound potential.