Research On Investment Strategy Based On Prospect Theory And Chinese Version Of Three-factor Model

Kahneman and Tversky(1979)proposed prospect theory,which is regarded as one of the important research achievements in the field of behavioral finance.In the financial market,the disposition effect is manifested.When investors are in the state of profit,they are more risk-averse and choose to sell stocks;when they are in the state of loss,they become risk-seeking and choose to hold stocks.This psychological activity will affect the final investment decision and the stock price.This paper will focus on the prospect theory to study the impact of irrational investment decisions on the return rate of stock portfolio when investors are in the state of profit and loss.This paper selects the data of China’s A-share market from 2011 to 2021,and calculates the Capital Gain Overhang(CGO)of the stock by using the closing price and turnover rate of the stock in the past 100 days.According to the prospect theory,the higher the CGO value,the higher the average profit of the holder of the stock in the market,so the stock portfolio has higher selling pressure,which affects the stock price.This paper will use univariate and bivariate grouping method to demonstrate the impact of CGO value on portfolio return.The empirical results show that there is A disposal effect in China’s A-share market.With the increase of the CGO value,the return rate of the portfolio gradually decreases,and the small market capitalization stocks have a more obvious disposal effect than the large market capitalization stocks,and the disposal effect is more obvious when the index runs offline at 250 days.The impact of CGO value on portfolio return is also different in different industries,such as communications,computer,electronics and other emerging technology industries have obvious disposal effect.And the traditional coal,steel,banking and other industries disposal effect is relatively weak.This paper also introduced the Chinese version of the three-factor model into the paper.Compared with the Fama-French three-factor model,the return ratio factor was used to replace the book-to-market factor,and a 2*3 group regression verification was conducted after removing 30%stocks after market value.After the GRS test,it is found that the Chinese version of the three-factor model has better explanatory power for the A-share market.In this paper,the Chinese version of the three-factor model is used as the benchmark point and as the risk adjustment factor of CGO.The conclusion shows that CGO is still effective in explaining portfolio returns.So this article will revolve around the prospect theory with the Chinese version of the three factor model is studied,in the last ten years of data by statistical CGO values to the investment behavior of the influence of the return on equity portfolio,and use the three factor model is more suitable for the Chinese market as the benchmark study,through the transmission pricing model with a different perspective,behavioral finance theory to explain combination yields,I hope it can give investors a reference and help to build portfolios.