Research On Multi-factor Quantitative Stock Selection Strategy Based On Alternative Three-factor Model

Chinese stock market has undergone tremendous changes,investment methods have become increasingly abundant since the stock market has experienced nearly 30 years of development.As the research of stock market has gone deeper,the new investment concepts such as quantitative investment have received increasing attention from investors since 2004.The multi-factor model is one of the most widely used models in quantitative investment,usually seen as CAPM,Fama-French model,etc.The alternative three-factor model used in this article is derived from the Fama-French three-factor model.The theoretical relationship between investment factor ?profitability factor and stock returns is determined.The applicability of the alternative three-factor model in China is further studied.In this paper,the constituents of the CSI 500 Index between June 2008 to May 2016 are selected to represent Chinese stock market.The seven classifications control capital markets anomalies' impact on the return of stocks.Then we evaluate the alternative three-factor model by time series regression and GRS test.In addition,the empirical test of the alternative three-factor model is carried out based on regression method,the coefficient and significance of the regression results are analyzed to obtain the final form of the alternative three-factor model.Based on the conclusions,we construct portfolios for outside-sample periods to compare the performance of the portfolio with the CSI 500 Index.According to the rate of return,excess return,victory ratio,sharp ratio,volatility,maximum drawdown and so on,we find that the investment portfolio can beat the market.This strategy of stock selection based on alternative three-factor model is effective.And this article supplements FamaFrench model as well as the existing multi-factor models,it can provide investors more investment options.