The Impact Of The COVID-19 Epidemic On The Adaptability Of The Three-Factor Model

In 1993,Fama and French put forward a three-factor model through their research on the factors affecting stock returns in the U.S.stock market,which has had an important impact on asset pricing theory and also has a strong guiding significance for investors to develop investment strategies.The model,as a classical asset pricing theory,has been widely verified in western developed countries,and scholars in China have also done a lot of empirical tests,however,domestic research mostly takes the macro stock market as the research object,and there are fewer industry-specific research cases.Coupled with the outbreak of the new crown epidemic in December 2019,the study of the applicability of the three-factor model in the Chinese stock market under the epidemic is not sufficient.In this paper,we select four industries(steel,utilities,textile and apparel,and food and beverage)that are closely related to the people’s livelihood and clothing in China under the epidemic to test the applicability of the three-factor model.Since the outbreak of the new crown epidemic has gone through several different stages,this paper selects three representative time points for the study:First,the epidemic first appeared at the end of 2019,and for the Chinese stock market,the real impact of the epidemic starts from the first trading week after the Spring Festival holiday in 2020,so this paper selects the first trading day after the Spring Festival in 2020,i.e.,February 3.2020,as the first time point for the study.Therefore,the first trading day after the Spring Festival in 2020,i.e.,February 3,2020,is selected as the first time point of the study,and the data of three months(i.e.,24 trading weeks)are selected forward and backward respectively at this point.The data of 24 trading weeks each for two time points are studied.In addition to their relevance to the people’s livelihood,food,clothing,housing,and transportation,the four sectors represent light-and heavy-asset enterprises.This paper will discuss in detail the differences and connections between light and heavy assets in terms of fixed assets as a percentage of total assets and operating profit,advertising,operations,R&D expenses,inventory,corporate cash flow,liabilities,capital turnover speed,and other indicators.The paper concludes that.(1)During the epidemic,the market factor explains the asset portfolio return better than the size factor,and the market value factor in turn has better explanatory power than the book-to-market ratio factor,and the market factor has optimal explanatory power.(2)The Fama-French model is invalid for thirty trading days after the start of the epidemic,during the most severe period of the epidemic in China,when the epidemic impacted our stock market.After this period,the Fama-French model regains its applicability.(3)The data sample from April 2020 to March 2021 deviates the most from the CUSUMSQ test threshold,and the regression coefficients of the three-factor model are the most unstable during this period.The coefficients of the steel and utilities industries,which operate with heavy assets,deviate from the critical line to a greater extent,and the industry coefficients are more volatile;the coefficients of the textile and apparel industry and the food and beverage industry,which operate with relatively light assets,are more stable and deviate from the critical line to a lesser extent.The outbreak of the new crown epidemic has a greater impact on the asset-heavy industries,while the textile and apparel industry and the food and beverage industry have a lesser impact.