The Test Of The Applicability Of Multi-factor Theory In A-share Market

The efficient market hypothesis holds that the stock price is always correct and the stock yield is unpredictable.In the capital asset pricing model proposed by Sharp et al,it is also shown that the investment income is divided into two parts: alpha(income independent of market volatility)and beta(income from market risk),and it is very difficult to obtain alpha.Only beta is the market risk that affects the expected return of stock in the future.However,behavioral finance schools believe that there are mispricing and certain ineffectiveness in the market,and investors can gain excess returns by arbitrage when they are mispriced.Later,scholars discovered that stocks were based on certain characteristics.Classification and selection of a portfolio that conforms to the characteristics can obtain unexplained returns of market risk,such as momentum effect,value effect,low leverage effect and so on,which indicates that the return is predictable.Academically,this phenomenon contrary to the efficient market hypothesis and CAPM model is called aberration.Then Fama and French try to explain the abnormal market can get excess returns,and propose a three-factor model.Based on the three-factor theory of Fama-French,this paper makes an empirical study on the A-share market of our country by using the widely used multi-factor investment strategy in the present investment market to test whether there is any violation of the A-share market in China.Can the excess return be obtained by constructing a portfolio with certain characteristics on the basis of the anomalies of the efficient market hypothesis and the CAPM model.This paper draws lessons from previous studies on market excess returns and finds that it is particularly important to reflect the fundamental financial indicators of the comprehensive quality of listed companies and to consider whether the stock price deviates from the value of the valuation index.Therefore,this paper focuses on selecting the most comprehensive factors from the two dimensions of quality and valuation of listed companies,and tests whether each candidate has the ability to construct market anomalies.Based on a series of data processing and statistics of the factors,11 effective quality factors with the ability to construct anomalies were screened out of the 38 initial factor databases by using the platform.In order to avoid the existence of collinearity between factors,One effective factor is tested by multiple collinearity test,and two factors which are collinear with other factors and whose ability to interpret anomalies are relatively poor are eliminated.In addition,the three commonly used valuation indicators are tested and the evaluation criteria that the strategy needs to be satisfied are obtained.After obtaining the final effective quality factor and the evaluation condition,the multifactor strategy is constructed,and the effective factor is assigned.The traditional equal weight method and dynamic scoring method are adopted in this paper.This paper tests whether the A-share market in China can obtain excess returns by constructing a dynamic multi-factor portfolio with high quality and low valuation.The above empirical results are further explained and analyzed in this paper.First of all,the author thinks that the biggest reason for the existence of excess returns in China's A-share market is that there are a lot of information insensitive in the Chinese market,and it is easy to catch up and kill the retail investors,resulting in the existence of systematic valuation bias,that is,market ineffectiveness.Thus,it lays a foundation for investors to obtain excess returns through strategic research.In addition,the listed company with high comprehensive score of quality dimension represents its better profit stability and higher management level,which directly reflects the strong competitive strength and development ability of the company.Thus,in the market and in the hearts of investors have a certain degree of credibility and prestige,Therefore,it is easier to obtain market excess return by investing in the group of listed companies with the highest score and the most comprehensive ability.Furthermore,the addition of low valuation conditions to a certain extent excludes the high valuation stocks with good performance but difficult to meet the expectations,so that the strategy has a certain margin of safety.Finally,because the market environment is constantly changing,the contribution of effective factors in each issue will be different.A multi-factor stock selection model suitable for China's stock market is constructed to make the model more robust and close to the market.The above factors make the dynamic multi-factor strategy based on the dimension of quality and valuation has achieved considerable excess returns in China's A-share market.