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Adjust factor with volatility model using MAXFLAT low-pass filter and construct portfolio in China A share market

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  • Ke Zhang

Abstract

In the field of quantitative finance, volatility models, such as ARCH, GARCH, FIGARCH, SV, EWMA, play the key role in risk and portfolio management. Meanwhile, factor investing is more and more famous since mid of 20 century. CAPM, Fama French three factor model, Fama French five-factor model, MSCI Barra factor model are mentioned and developed during this period. In this paper, we will show why we need adjust group of factors by our MAXFLAT low-pass volatility model. All of our experiments are under China's CSI 300 and CSI 500 universe which represent China's large cap stocks and mid-small cap stocks. Our result shows adjust factors by MAXFLAT volatility model have better performance in both large cap and small cap universe than original factors or other risk adjust factors in China A share. Also the portfolio constructed by MAXFLAT risk adjust factors have continuous excess return and lower beta compare with benchmark index.

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  • Ke Zhang, 2023. "Adjust factor with volatility model using MAXFLAT low-pass filter and construct portfolio in China A share market," Papers 2304.04676, arXiv.org, revised Apr 2023.
    • Handle: RePEc:arx:papers:2304.04676
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    References listed on IDEAS

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    3. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
    4. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    5. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    6. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Cited by:

    1. Ke Zhang, 2023. "Construct sparse portfolio with mutual fund's favourite stocks in China A share market," Papers 2305.01642, arXiv.org.

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