The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix

Xinming Chen; Peng Song; Ke Gao; Yankuo Qiao

doi:doi:10.11648/j.ijefm.20170504.13

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The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix

Xinming Chen, Peng Song, Ke Gao, Yankuo Qiao

Published in International Journal of Economics, Finance and Management Sciences (Volume 5, Issue 4)

Received: 19 July 2017 Accepted: Published: 19 July 2017

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Abstract

In the traditional portfolio model, investors calculate the expected return of assets and the covariance matrix for optimal asset allocation. This paper divides market sentiment period into three states and selectes the securities in the Chinese stock market to construct portfolios. We implement both the Fama-French five-factor model and the robust median covariance matrix approach for predicting the expected return of the selected stocks and portfolio optimization respectively. Then we compare the performance of the portfolio constructed by the Fama-French three-factor model with that by the traditional covariance matrix in different market sentiment periods. The empirical results indicates that the performance of the portfolio constructed by the Fama-French five-factor model is more sensitive to the fluctuation of stock market sentiment, and that the robust median covariance matrix approach tends to have relatively stable portfolio return, while ineffective in the bull market. The main contribution of this paper is having empirically tested different model combinations in portfolio theory using the data of Chinese market where market sentiment has unique impact. To some extent, this paper provides a reference to the portfolio strategy.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 5, Issue 4)
DOI	10.11648/j.ijefm.20170504.13
Page(s)	222-228
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Fama-French Five-Factor Model, Robust Median Covariance Matrix, Application of Portfolio

References

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[5]	Carhart M M. Survivor bias and persistence in mutual fund performance [D]. University of Chicago Graduate School of Business, 1995.
[6]	Fama E F, French K R. Incremental variables and the investment opportunity set [J]. Journal of Financial Economics, 2015, 117(3): 470-488.
[7]	Zhang Xiecheng.The study on the China's A-share market with Fama-French three-factor model [D]. Fudan university, 2012.
[8]	Zhao Shengmin, Honglei, Zhang Kai.Does Fama-French Five Factor Model Outperform Three Factor Model? Evidence from China's A-Share Market [J]. Nankai Economic Studies, 2016(2):41-59.
[9]	Campbell N A. Robust procedures in multivariate analysis I: Robust covariance estimation [J]. Applied statistics, 1980: 231-237.
[10]	Visuri S, Koivunen V, Oja H. Sign and rank covariance matrices [J]. Journal of Statistical Planning and Inference, 2000, 91(2): 557-575.
[11]	Rousseeuw P J, Van Aelst S, Van Driessen K, et al. Robust multivariate regression [J]. Technometrics, 2012.
[12]	Kim T H, White H. On more robust estimation of skewness and kurtosis [J]. Finance Research Letters, 2004, 1(1): 56-73.
[13]	Ergun A T. Skewness and Kurtosis Persistence: Conventional vs. Robust Measures [C] //Midwest Finance Association 2012 Annual Meetings Paper. 2011.
[14]	Huo L, Kim T H, Kim Y. Robust estimation of covariance and its application to portfolio optimization [J]. Finance Research Letters, 2012, 9(3): 121-134.

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APA Style

Xinming Chen, Peng Song, Ke Gao, Yankuo Qiao. (2017). The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix. International Journal of Economics, Finance and Management Sciences, 5(4), 222-228. https://doi.org/10.11648/j.ijefm.20170504.13

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ACS Style

Xinming Chen; Peng Song; Ke Gao; Yankuo Qiao. The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix. Int. J. Econ. Finance Manag. Sci. 2017, 5(4), 222-228. doi: 10.11648/j.ijefm.20170504.13

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AMA Style

Xinming Chen, Peng Song, Ke Gao, Yankuo Qiao. The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix. Int J Econ Finance Manag Sci. 2017;5(4):222-228. doi: 10.11648/j.ijefm.20170504.13

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@article{10.11648/j.ijefm.20170504.13,
  author = {Xinming Chen and Peng Song and Ke Gao and Yankuo Qiao},
  title = {The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {5},
  number = {4},
  pages = {222-228},
  doi = {10.11648/j.ijefm.20170504.13},
  url = {https://doi.org/10.11648/j.ijefm.20170504.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20170504.13},
  abstract = {In the traditional portfolio model, investors calculate the expected return of assets and the covariance matrix for optimal asset allocation. This paper divides market sentiment period into three states and selectes the securities in the Chinese stock market to construct portfolios. We implement both the Fama-French five-factor model and the robust median covariance matrix approach for predicting the expected return of the selected stocks and portfolio optimization respectively. Then we compare the performance of the portfolio constructed by the Fama-French three-factor model with that by the traditional covariance matrix in different market sentiment periods. The empirical results indicates that the performance of the portfolio constructed by the Fama-French five-factor model is more sensitive to the fluctuation of stock market sentiment, and that the robust median covariance matrix approach tends to have relatively stable portfolio return, while ineffective in the bull market. The main contribution of this paper is having empirically tested different model combinations in portfolio theory using the data of Chinese market where market sentiment has unique impact. To some extent, this paper provides a reference to the portfolio strategy.},
 year = {2017}
}

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TY  - JOUR
T1  - The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix
AU  - Xinming Chen
AU  - Peng Song
AU  - Ke Gao
AU  - Yankuo Qiao
Y1  - 2017/07/19
PY  - 2017
N1  - https://doi.org/10.11648/j.ijefm.20170504.13
DO  - 10.11648/j.ijefm.20170504.13
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 222
EP  - 228
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20170504.13
AB  - In the traditional portfolio model, investors calculate the expected return of assets and the covariance matrix for optimal asset allocation. This paper divides market sentiment period into three states and selectes the securities in the Chinese stock market to construct portfolios. We implement both the Fama-French five-factor model and the robust median covariance matrix approach for predicting the expected return of the selected stocks and portfolio optimization respectively. Then we compare the performance of the portfolio constructed by the Fama-French three-factor model with that by the traditional covariance matrix in different market sentiment periods. The empirical results indicates that the performance of the portfolio constructed by the Fama-French five-factor model is more sensitive to the fluctuation of stock market sentiment, and that the robust median covariance matrix approach tends to have relatively stable portfolio return, while ineffective in the bull market. The main contribution of this paper is having empirically tested different model combinations in portfolio theory using the data of Chinese market where market sentiment has unique impact. To some extent, this paper provides a reference to the portfolio strategy.
VL  - 5
IS  - 4
ER  -

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Author Information

Xinming Chen

The School of Government, Central University of Finance and Economics, Beijing, China
Peng Song

The School of Statistics and Mathematics, Central University of Finance and Economics, Beijing, China
Ke Gao

The School of Finance and Taxation, Central University of Finance and Economics, Beijing, China
Yankuo Qiao

The School of Business, The State University of New Jersey, Newark, USA

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Plain Text BibTeX RIS

APA Style

Xinming Chen, Peng Song, Ke Gao, Yankuo Qiao. (2017). The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix. International Journal of Economics, Finance and Management Sciences, 5(4), 222-228. https://doi.org/10.11648/j.ijefm.20170504.13

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ACS Style

Xinming Chen; Peng Song; Ke Gao; Yankuo Qiao. The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix. Int. J. Econ. Finance Manag. Sci. 2017, 5(4), 222-228. doi: 10.11648/j.ijefm.20170504.13

Copy | Download

AMA Style

Xinming Chen, Peng Song, Ke Gao, Yankuo Qiao. The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix. Int J Econ Finance Manag Sci. 2017;5(4):222-228. doi: 10.11648/j.ijefm.20170504.13

Copy | Download

@article{10.11648/j.ijefm.20170504.13,
  author = {Xinming Chen and Peng Song and Ke Gao and Yankuo Qiao},
  title = {The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {5},
  number = {4},
  pages = {222-228},
  doi = {10.11648/j.ijefm.20170504.13},
  url = {https://doi.org/10.11648/j.ijefm.20170504.13},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20170504.13},
  abstract = {In the traditional portfolio model, investors calculate the expected return of assets and the covariance matrix for optimal asset allocation. This paper divides market sentiment period into three states and selectes the securities in the Chinese stock market to construct portfolios. We implement both the Fama-French five-factor model and the robust median covariance matrix approach for predicting the expected return of the selected stocks and portfolio optimization respectively. Then we compare the performance of the portfolio constructed by the Fama-French three-factor model with that by the traditional covariance matrix in different market sentiment periods. The empirical results indicates that the performance of the portfolio constructed by the Fama-French five-factor model is more sensitive to the fluctuation of stock market sentiment, and that the robust median covariance matrix approach tends to have relatively stable portfolio return, while ineffective in the bull market. The main contribution of this paper is having empirically tested different model combinations in portfolio theory using the data of Chinese market where market sentiment has unique impact. To some extent, this paper provides a reference to the portfolio strategy.},
 year = {2017}
}

Copy | Download

TY  - JOUR
T1  - The Application in the Portfolio of China's A-share Market with Fama-French Five-Factor Model and the Robust Median Covariance Matrix
AU  - Xinming Chen
AU  - Peng Song
AU  - Ke Gao
AU  - Yankuo Qiao
Y1  - 2017/07/19
PY  - 2017
N1  - https://doi.org/10.11648/j.ijefm.20170504.13
DO  - 10.11648/j.ijefm.20170504.13
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 222
EP  - 228
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20170504.13
AB  - In the traditional portfolio model, investors calculate the expected return of assets and the covariance matrix for optimal asset allocation. This paper divides market sentiment period into three states and selectes the securities in the Chinese stock market to construct portfolios. We implement both the Fama-French five-factor model and the robust median covariance matrix approach for predicting the expected return of the selected stocks and portfolio optimization respectively. Then we compare the performance of the portfolio constructed by the Fama-French three-factor model with that by the traditional covariance matrix in different market sentiment periods. The empirical results indicates that the performance of the portfolio constructed by the Fama-French five-factor model is more sensitive to the fluctuation of stock market sentiment, and that the robust median covariance matrix approach tends to have relatively stable portfolio return, while ineffective in the bull market. The main contribution of this paper is having empirically tested different model combinations in portfolio theory using the data of Chinese market where market sentiment has unique impact. To some extent, this paper provides a reference to the portfolio strategy.
VL  - 5
IS  - 4
ER  -

Copy | Download