An Empirical Study Of Q Factor’s Forcasting Ability Of Stock Returns

The issue of asset pricing is an enduring financial hotspot.As value investment strategies continue to be tested in practice,investors have begun to pay attention to the company’s financial and operating conditions,and scholars also constantly improve the pricing model based on the relevant factors of corporate profitability and investment,thereby enhancing the pricing efficiency of the capital market.In the process of exploring the multi-factor model,Hou,Xue and Zhang were the first to take the two Q factors of investment and profit into consideration in the pricing model to build a Q factor model.Fama and French also built a similar five-factor model.Studies have found that the four factors of the Q-factor model can adequately explain the factors in the five-factor model,which triggers controversy between the model and factor’s ability to explain stock returns.Domestic scholars have applied the abovementioned factor model to the China’s market,and found that whether the newly added investment and profit factors are beneficial to explain the returns of the China’s market is also controversial.So,in this context,studying the two Q factors of investment and profitability for stock return forecasting is of theoretical and practical significance.This article uses the data of listed companies in the A-share market from January 2006 to December 2019 as a sample,and the purpose is to explore the explanatory power of the Qfactor model on the returns of the China’s stock market,which can provide new evidence for this controversial topic.At the same time,the other purpose is to test the in-sample and out-ofsample prediction ability of Q factor on the excess return of China’s stock market in the state of A-share market,and further compare the difference between the two Q factors of investment and profit in predicting excess returns in the stock market.Finally,the robustness test is carried out,and the following conclusions are obtained:(1)Regarding the controversy between the factor model’s ability to explain stock returns,the conclusion shows that the Q-factor model can explain the excess returns of China’s stock market,and it is better than the Fama-French three-factor model and the five-factor model.(2)Both the company’s profitability and investment ability can significantly explain the cross-sectional return of stocks,but the company’s profitability has a stronger explanatory power than investment efficiency,which shows that as value investment strategies continue to be tested in practice,investors pay more attention to the company’s profitability.(3)The two Q factors of investment and profit can significantly predict the excess returns of the A-share market.The market presents the characteristics of effects related to profit and investment,and the investment factors have stronger out-of-sample prediction capabilities for the excess returns of the A-share market.(4)Under different market conditions,the Q factor has a significant ability to predict the excess return of the A-share market,but in a bull market,the profit factor has a stronger out-ofsample forecasting ability for the excess return of the A-share market portfolio.In the state of bear market,the investment factors are stronger.It shows that in a bull market,a large number of investors enter the market to invest,and the profit effect will be more significant.In a bear market,investors may be too pessimistic about the future,thus underestimating the future value of the affiliated company.Therefore,investors will need a higher risk premium,which leads to a more significant investment effect.