Factor Selection

We modified the multi-factor model to adapt for the Chinese stock market. Since some of the existing factors in the model have poor performance in the regression analysis and empirical test, it is significant to add or delete some of the factors to improve the model.

In accordance with previous studies, we selected two new factors (momentum factor and turnover factor). Firstly, the momentum effect is remarkable in the medium term of stock market. Momentum

effect was proposed by Jegadeesh and Titman (1993) to illustrate the phenomenon that stock performed well in the past is more likely to achieve higher return. Regarding the composition of investor and investment behavior in stock market, we suggested that the momentum e ffect can explain the part of the excess return. Secondly, we added a turnover factor into the model. Asset turnover rate is a component of DuPont analysis, which is used to analyze the return of shareholder's equity (Wild 2016). Asset turnover rate is a vital measure of a company's operation capacity. A higher asset turnover rate indicates that a company has better operation capacity and higher e fficiency. When conducting value investing, this financial ratio is primarily regarded before investment, as it can directly reflect the condition of a company, for example profitability, operation capacity, and so on.
