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

Division of Business Management, Beijing Normal University-HongKong Baptist University United International College, Zhuhai 519087, China
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J. Risk Financial Manag. 2019, 12(2), 91; https://doi.org/10.3390/jrfm12020091
Received: 28 April 2019 / Revised: 22 May 2019 / Accepted: 22 May 2019 / Published: 25 May 2019
(This article belongs to the Special Issue Mathematical Finance with Applications)
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Abstract

To search significant variables which can illustrate the abnormal return of stock price, this research 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 examined for new factors to extend the model by OLS and ridge regression model. With data from 2007 to 2018, the regression analysis was conducted on 1097 stocks separately in the market with computer simulation based on Python. Moreover, we conducted research on factor cyclical pattern via chi-square test and developed a corresponding trading strategy with trend analysis. For the results, we found that 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 moving average approach based on the relationships between risk factors and each industry was conducted in back-test which suggested that SMB (size premium), CMA (investment growth premium), CRMHL (momentum premium), and AMLH (asset turnover premium) can gain positive return. View Full-Text
Keywords: multi-factor model; risk factors; OLS and ridge regression model; python; chi-square test multi-factor model; risk factors; OLS and ridge regression model; python; chi-square test
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Huang, J.; Liu, H. Examination and Modification of Multi-Factor Model in Explaining Stock Excess Return with Hybrid Approach in Empirical Study of Chinese Stock Market. J. Risk Financial Manag. 2019, 12, 91.

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