Based on a single index model portfolio Factors
|Course||Probability Theory and Mathematical Statistics|
|Keywords||Portfolio Predictors Combination weight Return on assets Economic variables Factors Single- index model Empirical research Mean - Variance Risk-free asset Risk Aversion Bond index Financial variables Utility function China's capital market Repo rate Investment Strategy Excess return Stock market returns|
Portfolio theory is one of the key issues in modern finance. American economist Harry M. Markowitz proposed mean-variance portfolio theory in 1952, which laid the foundation of quantitative portfolio research. In the traditional portfolio theory, portfolio weights are determined by assets’ returns (mean) and risks (variance), hence, how to estimate mean and variance is very critical. Empirical research find moments of returns are partly predictable. Tremendous empirical studies document the predictability of returns and set up linear model to predict them. No matter the linear relationship between return and predictors is correct or not, portfolio weights are usually nonlinear in mean and variance, which means traditional methods distort the relation between portfolio choice and predictive variables.Given the fact above, Ait-Sahalia and Brandt (2001) determined directly the dependence of the optimal portfolio weights on the predictive variables, which avoided estimating mean and variance. They proposed the single-index model to study the importance of predictive variables to optimal portfolio weights. Predictive variables are combined linearly to an index in the single-index model and optimal portfolio weights depend on predictive variables only through the linear index. The index components can help investors determine which economic variables they should track.We do empirical research of china’s capital market in this paper using the method Ait-Sahalia and Brandt proposed in 2001 and we choose the assets of HS300 Index, Shanghai Stock Exchange T-Bond Index,7 days repurchase rate to study. As for the choice of predictive variables, not only the most popular economic variables, but also microeconomic and financial variables which could influence capital market significantly, because of the high systematic risk character of china’s capital market, will be covered. Hence, the empirical research of this paper analysis the magnitude of the economic variables to portfolio choice in china’s capital market combining macro and micro factors.