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Research on Improvement of Fama-French ThreeFactor Model Based on Jump Behavior

【Authors】
CHEN Fengwen, JIN Qihang & HU Zongbin 
【WorkUnit】
Chongqing University, 400030.
【Abstract】

In this paper, based on the theory of Bi-power variation, the existence of jump behavior in the Chinese stock market is verified by using the 5minute high-frequency trading data of the Shanghai Composite Index from May 2007 to June 2017. By decomposing the overall realized volatility into continuous volatility and jump volatility, the relationship between jump volatility and stock returns is examined. Finally, taking the Fama-French three-factor model as an example, this paper explores the application of jump behavior in forecasting earnings and risks. The conclusions are: (1) There are jump behaviors in Chinas stock market and the ratio of abnormal volatility is about 0.44, and there is a significant relationship between jump volatility and stock returns. (2) The four-factor model incorporating jump risk factors has a better fit and pricing efficiency than the Fama-French three-factor model and the jump risk factor can be used as an effective expansion factor. (3) The coefficients of the SMB factor and the HML factor of the two models are not much different in the rolling regression and the overall regression and both models have good stability. (4) The four-factor model has a greater common risk value, which is closer to the overall active risk, and the risk prediction and interpretation ability is stronger.
 
JEL:G11, G31

【KeyWords】
Jump Behavior, Fama and French Three-Factor Model, Return and Risk