Estimation of a Multifactor Model of Selected Industry Stock Returns in China

Abstract

Since the founding of People's Republic of China, the manufacturing industry has continued to develop rapidly, and an independent and complete industrial system with complete categories has been established, but now manufacturing industries are becoming saturated, and their development is slowing down. China's Internet industry has developed rapidly since 2010 and has huge potential. The focus of many investors in China has shifted from manufacturing to the internet industry. In order to better see the future development of China's manufacturing and internet industries, it is necessary to evaluate and analyze them. This thesis uses the estimated regression model to analyze the stock returns of China's manufacturing and Internet industries. We will introduce general information of investment and principle of investing, China’s stock market and current situation of China’s manufacturing and internet industry. Moreover，we will go into detail about the regression model. Which includes OLS method, hypothesis testing (T test and F test) and regression diagnostics (autocorrelation, heteroskedasticity, multiple multicollinearities). The results showed that China's manufacturing industry stock returns are positively correlated with business confidence index, Google Trends, Shanghai Composite Index, and stock trading volume, and negatively correlated with crude oil prices. China's Internet industry stock returns are positively correlated with corporate confidence, Google Trends, and the Nasdaq 100 Index, and negatively correlated with crude oil prices and stock trading volume. Overall, stock returns in both sectors are in line with Chinese macro data and stock markets. Investors can rest assured that the stock investment of the two industries can be used for hedging or diversification.