Empirical Test of Arbitrage Pricing Model for the SSE 50 Index Stocks

摘要

The objective of this paper is to test the applicability of arbitrage pricing theory specifically for the performance of the SSE 50 Index composite stocks listed on China's Shanghai Stock Market. Two groups of the SSE 50 Index stocks have been selected and tested. Principal component analysis is used to extract the common factors that influence the daily mean rate of return without dividends of the selected stocks for the period from January 2, 2014 to July 21, 2017. Two-pass regression method is employed to test the significance of the common factors in arbitrage pricing model. The main findings in this analysis are that for the first group of 15 persistently included stocks in the SSE 50 index there could not be found out significant common factors, and for the second of 11 in-then-out stocks of the SSE 50 index there could be found out two significant common factors. The results of this study suggest that we should investigate separately into specific blocks of capital markets when we are checking the applicability of arbitrage pricing theory and designing optimal quantitative investment strategies based on arbitrage pricing model.