Proceedings of the 3rd International Conference on Economic Development and Business Culture (ICEDBC 2023)

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Evaluation of Stock Returns of Alpha-Factor Selection Strategy Based on Fama-French Three-Factor Model

Authors
Yujun Zhou1, *
1Department of Haide, Ocean University of China, Qingdao, 266100, China
*Corresponding author. Email: zhouyujun@stu.ouc.edu.cn
Corresponding Author
Yujun Zhou
Available Online 26 September 2023.
DOI
10.2991/978-94-6463-246-0_40How to use a DOI?
Keywords
Fama-French Three-Factor Model; Alpha; S&P500
Abstract

Fama-French model is a classic model for predicting stock returns. This paper proposed a new quantitative trading strategy based on the classic multi-factor selection strategy and the Fama-French three-factor model. The strategy uses the model to extract the intercept term in its fitting model. The study uses the S&P500 dataset to simulate the strategy in two time periods, 2000 to 2010 and 2012 to 2022, that these two time periods include two special periods separately, the financial crisis and the new crown epidemic. The result shows that the model cannot predict the intercept value effectively. This original strategy made 0.3% and -2.11% yearly returns with 0.08 and -0.2 Sharpe ratios in the two datasets. Compared to the same time periods on the benchmark (equal-weighted portfolio), equal-weighted portfolios have 2.49% and 9.92% with 0.23 and 0.83 Sharpe ratios in both two datasets. However, using a long-only alpha strategy can improve the performance of both two datasets significantly. Long-only strategy made 9.12% and 18.16% yearly returns with 0.45 and 0.83 Sharpe ratios. Long-only strategy still carries a lot of risks and is significantly influenced by the market situation.

Copyright
© 2024 The Author(s)
Open Access
Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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Volume Title
Proceedings of the 3rd International Conference on Economic Development and Business Culture (ICEDBC 2023)
Series
Advances in Economics, Business and Management Research
Publication Date
26 September 2023
ISBN
978-94-6463-246-0
ISSN
2352-5428
DOI
10.2991/978-94-6463-246-0_40How to use a DOI?
Copyright
© 2024 The Author(s)
Open Access
Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Cite this article

risenwbib
TY  - CONF
AU  - Yujun Zhou
PY  - 2023
DA  - 2023/09/26
TI  - Evaluation of Stock Returns of Alpha-Factor Selection Strategy Based on Fama-French Three-Factor Model
BT  - Proceedings of the 3rd International Conference on Economic Development and Business Culture (ICEDBC 2023)
PB  - Atlantis Press
SP  - 326
EP  - 335
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6463-246-0_40
DO  - 10.2991/978-94-6463-246-0_40
ID  - Zhou2023
ER  -