Empirical Research And Strategy Backtesting On The Fama French Five-Factor Model In The China A-share Market

What factors determine stock returns?Whether the factors can be quantified or not quantified is always a problem pursued by academia and investors.In the theoretical system of finance,the key point of capital asset pricing model(CAPM),Fama French Three-Factor model and Five-Factor model are to analyze what factors affect stock returns.In the study of the CAPM model,Fama and French(1992)found that beta factor does not fully explain the stock portfolio excess return,while portfolio size and valuation characteristics of excess profits have a significant explanatory power,and put forward the Fama French Three-Factor model.Then,Fama and French(2015)added a profit factor(RMW)and investment factor(CMA)to the Fama French Five-Factor model on the basis of the Fama French Three-Factor model,and tested the effectiveness using the NYSE market data from 1963 to 2013.The author of this paper compiles this paper around the Fama French Five-Factor model The author first uses the actual market data of China A share from 2010 to 2017 to conduct an empirical analysis of Fama French Five-Factor model.The empirical analysis results show that Fama French five factor can largely explain China A stock market excess returns,and within the five factors,market factor,size factor and value factor explain obvious effect on on Chinese A stock market excess returns,while profit factor and investment factor explain not obvious effect.i.e.stock price strongly relates to the changes in the market,and stock of smaller firms and growth firms are easier to obtain excess returns,but the level of profit and investment radical or not had no significant effect on the level of stock returns.On the basis of the statistical analysis results,the author has compiled and backtested the Fama five factor quantifying trading strategy on the well-known domestic quantitative strategy platform-JointQuant.This quantitative strategy uses factor selection method to make portfolio according to the factors except market factor in the Fama Five-Factor model.After sorting each factor according to the size of each factor,the stock adjustment list is selected according to the ranking results.After testing the four portfolios,we found that the results of the strategy regression test are highly consistent with the statistical analysis results.The stock portfolio based on the scale factor and the value factor can indeed achieve a significant excess return comparing to the benchmark,which matches the significant level of the scale factor and the value factor in the statistical analysis.The stock portfolios based on the income factor and the investment factor can not achieve significant excess return,consistent with the low significant level of the two factors in the statistical analysis.The four factor portfolios are highly correlated with the market trend and match the very high level of market factors in the statistical analysis.The value of this paper is to verify the applicability of the Fama Five-Factor model in China A share market from two aspects of empirical analysis and quantitative strategy backtesting,and the conclusion can be used for reference to market investors.However,due to the influence of quantization platform and backtesting time on quantified strategy,the above conclusion is only for reference,and it still has the possibility of contrary to the result of real trading.