A Research On The Validity Of The Market Estimation Rate Facotr In China's A-share Market

Valuation factors have been widely used in stock valuation and stock selection.Classic valuation factors include price-to-earnings ratio,price-tobook ratio,market-to-sales ratio,and market-to-cash flow rate.These factors use a single financial indicator to estimate stocks.The P/E ratio uses net profit,P/B ratio,net asset,market-to-sales rate,sales,and cash flow rate.This method is easy to understand,and the factor value is easy to calculate,but it is often too simple to emphasize single finance.The impact of the indicators is inevitably too one-sided and the effect is not ideal.In this paper,based on the basic principle of Olson's model,market estimation rate factor is constructed.The market estimation rate refers to the ratio of the total market value of stocks to the value of the firm based on the Olsen model.The Olson model considers that the firm's value is equal to the net asset's book.Value plus the present value of residual income.Then,this paper selects the CSI 300 constituents from January 1,2013 to August 31,2018 as a sample,and uses the method of quantitative investment to empirically verify the validity of the market estimation rate factor.The definition of effectiveness in this paper refers to,in the backtest the market estimation rate factor has obtained excess returns relative to the CSI 300 Index.The absolute value of IC mean is above 0.05,the absolute value of IR is above 0.1,and comparing with classic valuation factors of price-earnings ratio,price-to-book ratio,market-to-sales ratio and market-to-cash flow ratio,the market estimation rate factor has a higher annualized rate of return and a higher Sharpe ratio.In this paper,the statistical tools are used to calculate and analyze the market estimation rate factor value.Then,market estimation rate factor is grouped back and ICassisted analysis is used to test its validity.Before the test,the data is processed with null value.De-extreme,standardization,and neutralization processing.Research tools and concepts such as mean,standard deviation,and linear regression are used in the process.Classification is used in group backtesting.In IC-assisted analysis,correlation method is used.The statistical analysis shows that market estimation rate factor is a good valuation indicator for the overall market of the A-share market.When the median of the CSI 300 stock that market estimation rate factor is below 1,the market is in an overall underestimation stage.The annualized rate of return of that market estimation rate factor reached 15.83%,and the annualized rate of return of the super-CSI 300 index was 10.80%.The IC-assisted analysis found that the IC mean value of the market-estimated factor reached-0.070 and the IR value reached-0.333.It indicates a significant negative correlation between the factor and the next-stage earnings.Comparing the market valuation factor with the price-earnings ratio,price-to-book ratio,market-tosales ratio,market-to-market ratio and other valuation factors,that market estimation rate factor has the best performance among these factors,which is the most preferable among the valuation factors.Therefore,the research results show that the that market estimation rate factor is effective in China's A-share market.Further tests by the industry on that market estimation rate factor show that that market estimation rate factor has the best effect in stock selection in the three industries of building decoration,non-ferrous metals and banks.