Research on Stock Picking Strategies Based on the Three-Factor Model: The case for the SSE STAR and A-share Markets

Abstract

Investors care about how to choose a portfolio that is worth investing in from the huge stock market in China because they want to obtain a high rate of return (RoR) by controlling the investment risk. Then, the three-factor model as a quantitative investment strategy can effectively satisfy investors’ requirements by selecting influential factors highly related to stock prices. Moreover, current existing journals on three-factor stock selection strategies in China mostly use constituent stocks of CSI 300 as research data, and there are few studies on the SSE Composite Index, especially the SSE STAR Market which was officially opened in June 2019. Therefore, based on the demand of investors and the innovation of sample data, this paper selects the SSE STAR Market as the stock pool to construct a three-factor model and uses data of the A-share market to construct another model simultaneously for comparison. Finally, the research result of this paper demonstrates that the three-factor model can predict the RoR of the SSE STAR Market and A-share market well, so it can be used to predict the RoR in the actual investment process and then provide an objective suggestion for the investors in the real-world stock market.