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Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

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7 Fundamental Analysis

By Xinye Tang/Kailin Qi

In our alpha research, researchers are attempting to find any strategy that has statistically significant predictive power on asset returns. These strategies, or what we call “signals,” are designed by using such tools as mean-reversion, lead-lag effect, momentum, analyst rating information, news sentiment, etc. Fundamental analysis, regarded as the cornerstone of investment, is obviously a very important direction of alpha signal design.

When talking about stocks, fundamental analysis is defined as the technique that attempts to determine a security’s intrinsic value by analyzing underlying factors that may affect a company’s actual business and its future prospects. We are trying, via fundamental analysis, to answer such questions as: Is the company’s revenue steadily growing? How is the company’s debt solvency capacity? Does the company have good profitability as well as high earning quality? Does the company have enough liquid assets compared to liabilities, etc.?

On a broader scale, fundamental analysis refers to the analysis of the economic well-being of a financial entity as opposed to its price movements exclusively. One can perform the analysis on sectors/industries or even the economy as a whole instead of single stocks. Contrary to fundamental analysis, technical analysis – which is another major form of security analysis and an important direction in alpha research – focuses solely on the price and volume movements ...

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