Optimized Inquiry Of The Chinese Version Of The Three-Factor Model Based On The ESG Rating Indicator

ESG is an investment philosophy and corporate evaluation standard that focuses on corporate environmental,social and governance performance rather than financial performance.The rating system converts the social value that the enterprise should undertake into specific enterprise development indicators,and then integrates it into the specific enterprise value,and urges enterprises to actively pay attention to the overall social value,assume social responsibility,promote economic and social health and sustainable development.Jianan Liu et al.(2019)proposed the Chinese version of the three-factor model CH-3,which improved the Fama-French three-factor model to make it more suitable for the Chinese stock market.Based on the positive restraint and normative effect of ESG on enterprises,this thesis introduces the ESG rating data of Shanghai Huazheng Index Company on the basis of this model,and attempts to further improve the model’s ability to explain the excess returns of investment portfolios in China’s A-share stock market.First,there are two factor construction approaches that separately construct ESG variables.First,the standardized ESG factor is constructed following the market factor MKT;second,ESG is used as an influencing factor that affects the sensitivity of market systemic risk to construct the ESG·MKT cross term.According to the regression results and the GRS test of the above two models,the Adj-R2 increased but the GRS value did not decrease as expected.It is judged that the results were biased due to the partial overlap between the ESG rating index and the coverage of the three-factor variables.Therefore,it is further considered to split ESG into separate E,S,and G single evaluation factors,and reconstruct the cross term for independent regression.This result shows that when only S·MKT is introduced into CH-3,the Adj-R2 of the model also increases.And while the S·MKT coefficient remains as significant as the ESG·MKT coefficient,its GRS value decreases.It can be seen that the introduction of social(S)factors in ESG as an influencing factor affecting the sensitivity of market systemic risk into CH-3 can improve the model’s ability to explain the excess returns of investment portfolios in China’s A-share stock market.This also shows that China’s A-share stock market is generally more sensitive to social factors than environmental factors and corporate governance.Secondly,adopt the factor construction method in which ESG and other variables are used as ranking variables to participate in the joint grouping,and reconstruct the independent and dependent variables.The regression results show that when the dependent variable is constructed by SIZE-ESG crossover,the GRS value of the model and the absolute mean of the model intercept term are greatly reduced,and the model results are the best.This result proves that the introduction of ESG can effectively improve the explanatory power of the model.At the same time,the thesis also selects the CSI 300 constituent stocks that can approximately represent 70%of the A-share market value for regression comparison,and the comparison can reach the same conclusion.And it is found that when the CSI 300 constituent stocks with larger market value are selected,the GRS test results are better than when all A shares are substituted.Finally,since the above empirical evidence shows that the sensitivity of excess returns to different ESG single evaluation factors is different,further analysis is carried out.By grouping industries to construct dependent variables,we explore the differences in the sensitivity of different industries to E,S,and G single indicators.The empirical evidence shows that this phenomenon is largely influenced by the characteristics of the industry itself.