Establishment And Application Of Multi-factor Stock Selection Model

Quantitative investment is gradually popularized recently in China, and quantitative stock selection strategy is optimized correspondingly. Based on multi-factor stock selection model, two kinds of factor empowering methods-Analytic Hierarchy method and Equal Weight method were raised. Based on financial data and market data of listed companies combined with statistical testing methods, empirical analysis comparison between multi-factor stock selection models under the two empowering methods was made in an attempt to optimize the multi-factor stock selection models.First of all, the article background,research significance and literature review was described. Secondly, concepts and theories related with quantitative stock selection was described, including quantify stock selection model classification, analytic hierarchy process, capital asset pricing model, arbitrage pricing theory, Fama three-factor model, etc. Thirdly, the selection and test for effective factor was described, including testing procedure of effective factor and validity criteria of measuring factor. Lastly, comprehensive scoring model under analytic hierarchy process and equal weight method were established, a comparison between different multi-factor stock selection models under two empowering methods was made, and validity of models were tested.As to the selection for factors, apart from valuation factor, growth factor, capital structure factor and technical factor of company level, Consensus expectation factor was added in this paper. 28 factor indexes of 5 classes were selected in total. Financial data and market data from January 2001 to December 2008 from Shanghai stock exchange A share was selected. Combined with statistical analysis method, the validities of 28 candidate factors were tested. Through the testing and selection for effective factors, 9 relative better ones of the 28 effective factors were selected, including price to book value, price cash flow ratio, ROE growth rate, ROA growth rate, operation revenue growth rate, net profit growth rate, earnings per share, one month turnover rate, consensus forecast net profit ratio growth rate.Based on effective factors, comprehensive scoring models under two empowering methods were set up by using stock scoring method. That is to say, analytic hierarchy process and equal weight method were adopted to empower effective factor and set up multi-factor stock selection model. Financial data and market data from January 2009 to December 2014 from Shanghai stock exchange A share was selected to test the two stock selection models under two empowering methods. Testing indexes include accumulative return rate, annual compound yields, annual excess returns, information ratio and outperformed benchmark month proportion. The empirical analysis shows that multi-factor stock selection models under two empowering methods can both overcome Shanghai securities composite index, and there is no significant difference between multi-factor stock selection model under analytic hierarchy process and that of equal weight method. Portfolios established by multi-factor stock selection models under two empowering methods are effective, which is competent to be a reference for stock investors.