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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

Received: 19 July 2017     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), 2017. Published by Science Publishing Group

Keywords

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

References
[1] Markowitz H. Portfolio selection [J]. The journal of finance, 1952, 7(1): 77-91.
[2] Ross S A. The arbitrage theory of capital asset pricing [J]. Journal of economic theory, 1976, 13(3): 341-360.
[3] Sharpe W F. Capital asset prices: A theory of market equilibrium under conditions of risk [J]. The Journal of Finance, 1964, 19(3): 425-442.
[4] Fama E F, French K R. The cross‐section of expected stock returns [J]. the Journal of Finance, 1992, 47(2): 427-465.
[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.
Cite This Article
  • 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
  • The School of Government, Central University of Finance and Economics, Beijing, China

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

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

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

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