Technical Deep Dive: How We Validate Macro Factors

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Every strategy starts with a macro factor question. Here's how we validate each one.

CNH-CHAU: Does offshore RMB reflect real cross-border capital flows?

The question: Is the CNH-CNY spread a reliable proxy for global capital sentiment on China?

Validation approach:

• Track CNH vs. CNY spreads against actual cross-border transaction data
• Compare with FDI flows and capital account data
• Test correlation across different monetary policy regimes (PBoC easing vs. tightening)

Why it works: CNH is traded offshore, free from PBoC intervention. When global capital wants China exposure, CNH strengthens. When capital flees, CNH weakens. This is real money voting, not survey data.

DIP-A: Is limit-down an accurate panic gauge?

The question: Does the number of limit-down stocks reliably indicate extreme retail selling pressure?

Validation approach:

• Compare limit-down frequencies against retail positioning data
• Cross-reference with margin liquidation events
• Test against hedge fund activity during the same periods

Why it works: China's ±10% limit-down rule creates a unique phenomenon: when hundreds of stocks hit the floor, it's not random—it's cascade selling. This doesn't exist in markets without price limits.

IF-IC: Can capital controls create two independent fund channels?

The question: Do IF (CSI300 futures) and IC (CSI500 futures) really behave as independent channels?

Validation approach:

• Measure correlation between IF and IC during regime shifts
• Test whether they decorrelate when capital controls tighten
• Analyze basis spreads as indicators of institutional vs. retail flow

Why it works: China's capital controls create a structural separation between large-cap (institutional, connected to QFII) and small-cap (retail-dominated). When controls tighten, these channels diverge.

DIP-US: Does VIX spiking create mean-reversion edges?

The question: Are extreme VIX spikes reliable contrarian indicators for leveraged Nasdaq?

Validation approach:

• Measure realized volatility post-spike vs. implied volatility expectations
• Test across different volatility regimes (2008, 2020, 2022)
• Analyze the decay pattern of extreme VIX readings

Why it works: VIX extremes reflect options market panic pricing. When implied volatility overshoots realized volatility by a large margin, the market has over-discounted risk. TQQQ benefits from the subsequent normalization.

The Core Principle

We don't ask: "What pattern maximizes returns?"

We ask: "What is the real macro factor, and is it persistent?"

Patterns break when regimes shift. Macro factors are structural—they change slowly because they're rooted in regulatory frameworks, capital flow mechanics, and behavioral incentives that don't disappear overnight.

Full mechanism descriptions: AI Hall