Research On Stock Selection Strategy Based On MSCI Barra CNE5 Model Factors

The GDPs of different countries for the 3rd quarter of 2018 have been recently published.China is among the largest economy,with a GDP of $10 trillion,second only to the US economy,of which a $15.23 trillion GDP was recorded for the same period.The gap between the two economies has been further narrowed.Along with the development of the Chinese economy,people has seen growth in their disposable incomes,which have accumulated and added to the demand for financial investments.At the meantime,there are more than 3,500 firms listing on the Chinese stock exchanges,with a total market capitalization of over CNY 47 trillion,second only to the US stock exchanges.Therefore,it has become a necessity for stock investors to consider how to select the stocks more effectively,and how to beat the market and achieve sustaining returns.The answer to these questions is critical for people to improve their investment return and control their investment risks.This paper aims to develop a stock selection strategy based on the MSCI Barra China Equity Model(CNE5).The core to this research is multi-factor model,involving factors like beta,momentum,size,profitability,liquidity,residual volatility,growth and leverage,among others.The target stock market of this study is the Chinese A share markets.The research methodology is to analyse the historical data of the Chinese A Share markets using the MSCI Barra China Equity Model(CNE5)and find out the factors with highest explanatory powers to constitute selection models.Using the selection models,different portfolios of selected stock are constructed and monitored.Then the performance of the portfolios will be compared to the market index,and therefore to test the validity and effectiveness of the stock selection strategy and determine the optimal model for stock selection.Furthermore,to improve the performance of this strategy,the researcher has also added the ROE factor to the original models.The final results show that the strategy achieved a return of 60.39% from 2015 to 2019,an annualized return of 10.17%,and an excess return of 43.93% compared with the performance benchmark.