Section Rotation Effects On Excess Stock Returns

This paper mainly focuses on the section rotation effects on excess stock returns.The basic framework of our research comes from three-factor model of Fama-French(1992)[1],and we mainly use the two-step regression method of Fama-MacBeth(1973)[2]in our tests.We find that section rotation is a very common phenomenon in china's stock market.During fifteen years of our sample,every industry is always converting between strong sector and weak sector.We construct some variables to measure sector rotation,which were called sector rotation factor and risk premium related to sector rotation factor.As a final result,we find that risk premium related to sector rotation factor carries much variation of excess stock returns in time-series model,and sector rotation factor is always an important system risk factor in cross-section model.Our result shows little difference with three-factor model of Fama-French(1992)[1].Market risk premium,risk premium related to size and book-to-market equity have explanatory power in time-series model.When comes to the cross-section model,market risk factor ? has little information in average excess stock returns,risk factor related to size has positive power to explain average excess stock returns and risk factor related to book-to-market equity has negative power to explain average excess stock returns.The good news is that when we add section rotation variables to three-sector model,the time-series model and cross-section model are all be improved.