A factor pricing model based on double moving average strategy

YuZhi Chen (), Yi Fang (), XinYue Li and Jian Wei
Additional contact information
YuZhi Chen: Jilin University
Yi Fang: Center for Quantitative Economics of Jilin University
XinYue Li: Northeast Normal University
Jian Wei: GuiZhou University of Finance and Economics

Palgrave Communications, 2023, vol. 10, issue 1, 1-13

Abstract: Abstract The heterogeneous market hypothesis states that there are different types of investors with different investment term-structures in the stock market. Based on the hypothesis, we analyze the trading strategies of moving averages with different term structures, and we find that the trading strategies formed by the 1-month short-term moving average with 3-, 6-, 9-, 12-, 18-, and 24-month long-term moving averages can gain significant excess returns in the Chinese market. Accordingly, this paper adopts the moving average factor formed by the method of Liu’s to expand the current four-factor pricing model of the Chinese market. The results of spanning regression show that the introduction of the short-term average with a period of 1-month and the long-term moving average with a period of 3- and 12-month can significantly improve the pricing power. The GRS test developed by Gibbons et al. (1989) also shows that the augmented six-factor model with moving average factors can pass the test at the significance level of 5%, and the average absolute value of intercept terms decreases by about 50% compared with the results of the four-factor model. At the same time, under different macro-state dependence, the overall performance of the augmented six-factor model with moving averages is still better than that of the four-factor pricing model proposed by Liu et al.’s. Our main contribution is to introduce double moving average factors to capture the behaviors of investors’ different term structures and add these factors to the most competitive asset pricing model for enhancing the pricing power. It is of great significance to supplement the pricing model in the Chinese market.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/s41599-023-02362-x Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palcom:v:10:y:2023:i:1:d:10.1057_s41599-023-02362-x

Ordering information: This journal article can be ordered from
https://www.nature.com/palcomms/about

DOI: 10.1057/s41599-023-02362-x

Access Statistics for this article

More articles in Palgrave Communications from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().