Fama-French Five-Factor Model And Its Application In The Construction Of Quantitative Investment Strategy

From the single factor model to multi-factor model,asset pricing theory has developed constantly.Scholars try to find out the change rule of the market and effective factors affecting asset price to obtain excess returns.The five-factor model proposed by French and Fama is an outstanding achievement in asset pricing theory.Although the five-factor model has been verified in foreign markets that it has a certain ability to explain the excess return of the market,different market has different characteristics.Whether it works in the China's A stock market remains to be verified.Therefore,this paper use China's A stock market transaction data from 2005 to 2016 to do the empirical test that the five-factor model has strong explanatory power of explaining excess returns or not.Then,according to the characteristics of the market of our country,this paper build a industry factor,and add it to the five-factor model to test that it has a strong explanatory power for China's A stock excess returns or not,and it can improve the model or not.Finally,according to the new model,this paper build a investment strategies,expecting to achieve the perfect combination of theory and practice.The first part of this paper introduces the research status of asset pricing theory and the actual application of multi-factor model in the investment strategy.The second part introduces the development of asset pricing theory in detail,especially focused on the Fama-French five-factor model,and introduces the application principle of multi-factor model in stock investment.The third part is the first empirical test part of this paper.Through the Fama-Macbath cross-section regression and cross grouping time series regression to verify that the Fama-French five-factor model has strong explanatory power for the China's A stock market monthly data,and it is better than three-factor model.The fourth part is the second empirical test part of this paper.Based On the five-factor model,according to the characteristics of China's A stock market,to find out the pricing factor effectively,this paper build a industry factor which put forward some improvement.Than,add the industry factor into Fama-French five-factor model,the result of cross section regression and GRS test showed that the industry factor has a strong explanatory power for China's A share market monthly excess returns and it also can improve the five-factor model.The dailydata test shows that this factor has a certain long-term stability.The fourth part focuses on the practical application of the new model.Based on the newly constructed multi-factor model,this paper applied it to the stock picking process of A share market in China to build a quantitative investment model.At the same time,the validity of the new model can be tested from practice,and the theoretical value of practice can be realized.