Examination and Modification of Multi-Factor Model in Explaining Stock Excess Return with Hybrid Approach in Empirical Study of Chinese Stock Market

摘要

To search significant variables which can illustrate the abnormal return of stock price, thisresearch is generally based on the Fama-French five-factor model to develop a multi-factor model.We evaluated the existing factors in the empirical study of Chinese stock market and examinedfor new factors to extend the model by OLS and ridge regression model. With data from 2007 to2018, the regression analysis was conducted on 1097 stocks separately in the market with computersimulation based on Python. Moreover, we conducted research on factor cyclical pattern via chi-squaretest and developed a corresponding trading strategy with trend analysis. For the results, we foundthat except market risk premium, each industry corresponds differently to the rest of six risk factors.The factor cyclical pattern can be used to predict the direction of seven risk factors and a simple movingaverage approach based on the relationships between risk factors and each industry was conductedin back-test which suggested that SMB (size premium), CMA (investment growth premium), CRMHL(momentum premium), and AMLH (asset turnover premium) can gain positive return.