| Due to its rigor of mathematical statistics and its discipline not disturbed by human emotions,quantitative investing has developed rapidly over the past 40 years and is more commonly called an "investment revolution." Although quantitative investing was introduced into China in 2000,it has rapidly developed in the domestic capital market as the system of China stock market matures and its financial derivatives become increasingly abundant.Based on this background,this paper takes the domestic CSI A-share market as the research object,constructs a feasible quantitative stock selection factor,and tries to use MATLAB as a programming tool to empirically analyze the factor selection ability and backtest the simulation transaction.In this paper,we focus on building a factor strategy based on the deviation of stocks’ market valuation.Previous findings have shown that the Chinese stock market is still in its Weak-Form Efficiency stage as well as the validity of the residual income valuation model.Taking EMH(Effective Market Hypothesis)and the residual income valuation model as background,we construct a new market valuation factor,DIF,which we have proved to be both effective and profitable.And our purpose is the profitability and long-live of this factor strategy over the market benchmark with which we can develop a hedging portfolio.It’s necessary to apply these advanced methods to our market to develop more scientific and controllable ways in investing.This is also the main motivation that we use quantitative method to analyze this model.To be specific,we proved the effectiveness of industry neutralized DIF through the empirical study of data of last 10 years in A-share stock market.We also measure the profitability of each quintile group and the long-short group with reference to Richard Tortoriello’s factor method.All of the empirical work is done by MATLAB programming language.Except going through the whole frame of proving factor’s effectiveness,we also test the factor in simulation backtest system where we find the DIF factor can realize a yearly-profit of 51.28%and go way ahead HS300 and ZZ500 benchmarks.Moreover,after hedging with stock index futures,the yearly profit is 27.15%while the maximum drawdown is well controlled to 10.65%.The risk structure analysis afterwards shows DIF should not be the simple piled-up of traditional valuation factor but an effective factor with new information.As a conclusion,we verified the effectiveness of DIF model in both analytical frame and simulation frame.However,we could not promise a factor that will survive any situation anytime due to the fast-changing capital market environment.Thus,more hedging approach is necessary if DIF strategy is applied to the real investment.We hope this work could somehow make a contribution to both theory and practice in the research of related area. |
