Research On Improvement Of Three-factor Model Based On Jump Behavior And Its Applicability In China Stock Market

Since China's stock market has abnormal fluctuations,excluding the impact of normal fluctuations in the existing asset pricing model will increase the model's interpretation of the return on assets.The paper uses jump risk factor to measure abnormal returns in the stock market,and puts it into the Fama-French three-factor model to compare the strength of the two models' interpretation on stock returns.Only by identifying the risk exposure points and exposure levels,can the portfolio risk be effectively controlled.Based on the factor risk model,the paper decomposes the risk of the model,and examines the degree of explanation of the common risk of factors to the overall risk of the portfolio.The main contents and conclusions of this paper are as follows:Firstly,this article uses the monthly data of the constituent stocks of CSI from May 2007 to June 2017 as samples to examine the applicability of the CAPM model,the two-factor model and the Fama-French three-factor model in China.The results show that the mean value of the goodness-of-fit of the six portfolios of the CAPM model was about 0.7,the average of the goodness-of-fit of the two-factor model was about 0.84,the mean of the goodness of the three-factor model was 0.97,and the three-factor model was suitable for China,with better explanatory power than the CAPM model.Secondly,based on the five-day high-frequency trading data of the Shanghai Composite Index during the above period,this paper estimates and tests the existence of jump behavior in China's stock market through the theory of Bi-power variation,and finds that there are abnormal fluctuations in China,and the proportion is approximately 0.44.In this paper,the jump frequency fluctuations during the day are calculated to obtain the monthly frequency jump risk factor data.The relationship between jump behavior and cross-sectional stock returns is tested using the Fama-MacBeth regression method.The result shows that the jump behavior has a significant relationship with stock cross-section returns.Jump risk factors can be extended as an effective factor into the three-factor model.Thirdly,the paper examines the applicability of the extended three-factor model in China and compares the original three-factor model in terms of goodness of regression fit,pricing efficiency,and regression significance.To test the pricing efficiency of the model,this paper uses the GRS method and the three measurement indicators proposed by Fama.The results show that the extended three-factor model is higher than the original three-factor model in both the regression goodness of fit and the significance of the regression,and the intercepted return term tends to be zero.Whether it is the GRS method or the indicator proposed by Fama,the pricing efficiency of the extended three-factor model is higher than that of the original three-factor model.The original model has been improved after incorporating the jump risk factor.Finally,the stability of the SMB and HML factors' yields of the two models is investigated by utilizing the rolling regression method.The coefficients of the SMB factor and the HML factor of the two models are not much different in the rolling regression and the overall regression and both models have good stability.The extended three-factor model has a greater common risk value,which is closer to the overall active risk,and the risk prediction and interpretation ability is stronger.With the increase of market value and book-to-market ratio,the contribution of common risk(system risk)to the overall risk is increased in two models.