The Multi-factor Hedging Model

The shares market should be the barometer of a nation’s economy and it should be a leading indicator of real economic activity. However, the principle seems not worked in China. The shares market has been defined with the poor performance for a long time which opposite of China’s rapid economic development. It has be posed square criticism and doubt from the public. The reasons should be due to capital market is immature, socioeconomic system is not perfect and leaky skills in supervision. With the development of China’s financial markets in recent year, emerging financial instruments has changed the past simple investment method. It is good for investors reconstruction their own risk destitution to get a higher investment return. The aim of this study is trying to find out the factors which have sufficient effect on A-shares market, hedging with stock index futures to seek for a viable arbitrage strategy.The model have chosen 1035 stocks in A-share market since April 2003 and April 2012.The data of these stocks include the macroeconomic data, statistical indicators and fundamental data. Through the mix-effect regression analysis based on the panel data be processed to be more reliable, we got a multi-factor model which involve several risk factors like interest risk premium, credit growth, stock turnover rate, single season year growth rate of revenue, single season year growth rate of profit and so on. Based on the regression equation, we tested robustness of this model by creating the stock portfolio chosen by the multi-factor model and verifying whether the excessive return of this portfolio against HS300 index is significantly greater than 0 during April 2012 to March 2014, and the results is this multi-factor model does a certain extent explain the source of the excess return of stocks, and the excessive return of the portfolio is significantly greater than 0.At last, we studied the implement possibility of hedging strategies. Compared the return rate of bull asset portfolio by simple scoring filtering system and industry weighted-scoring filtering approach. Then, we compared the return rate of hedge portfolio asset under market value hedge method and minimum variance hedge method. Finally, this study got a risk arbitrage viable strategy in A-shares market of China.