A Stock Selection Investment Strategy Based On A Factor Model

The vigorous development of the capital market has enabled investors to continuously raise the requirements for the effectiveness of investment strategies.In empirical areas,Fama-French family factor model applied to China's stock market is not uncommon,but where does the theoretical support of these factors come from? What factors are associated with potential factors in statistics?Is it too simplistic to describe the benefits through a factor model?In order to solve these doubts,this paper is based on the selection of high-quality stocks with high yield and the following research based on the information contained in the data.First of all,using the high-dimensional factor analysis method to extract potential factors,and substitutable tests with observable factors,aiming to construct a stock selection model with both theoretical basis and economic meaning.Based on the monthly yield of 432 stocks that meet the requirements in the past 7 years,the high-dimensional factor analysis was performed and the results were extracted as four potential factors.The observable factor is set as the six kinds of factors currently widely recognized in the market,and the six types of factors are tested for the exact alternative test and the approximate alternative test.After testing,four factors can be determined to be related to potential factors.Therefore,observational factors constitute a high-dimensional factor model.Secondly,taking into account the diversity of empirical research of stock selection,the introduction of style rotation strategy is helpful for factor model because of the close relationship between Fama-French family factor and market value in the process of construction.We compare the absolute return and the relative return of the CSI 300 Index and the CSI 500 Index successively and forecast the July 2017 as the forecast period by drawing the moving average curve of relative strength index.The result shows that the forecast Period should invest in small cap stocks market.Select the small pool of stocks in the original stock pool,and use the high-dimensional factor model that has been constructedto calculate the average expected rate of return of all the stocks in the pool of new stocks one by one.From the largest to the smallest rate of return,select the first 30 stocks as the final investment portfolio of this article.Finally,calculating the performance indicators of the portfolio,the analysis can be obtained in the third quarter of 2017,the combined annualized rate of return of 37.15%,Sharpe Ratio and Information Ratio are positive.This shows that after considering the risk factors,the portfolio returns are still positive.The portfolio is better than the risk-free market and the SSE stock market.In general,under the new model of high-dimensional factor analysis and style rotation strategy,the stock returns have been very impressive with obvious advantages.