Case 1

#1
1.1 The data comes from CSMAR database. We collect the data from China Stock Market Series.
1.2 The weekly returns of all stocks that listed on both Shenzhen and Shanghai main boards
(including small and medium-sized boards) from January 4, 2017 to December 27, 2020 are
concerned. In addition, we use weekly return without cash dividend reinvested, because we don’t
consider the dividend in CAPM model.

1.3 We use the aggregated weekly market return as market return.

1.4 We get risk-free interest rate from bond market.

#2
2.1 First, we use Python to analyze and generate the data together to prepare for regression model.
We divide the data into three parts according to time where each part consists of about 68 weeks.

2.2 We use the first part to calculate the Beta coefficient of individual stocks. The single factor
model we used is
r i , t=α i + β i r m ,t + ε i
where r i , t is the weekly return of stock i in week t . Then we take the expected value of the
sentence, and we get
E(r ¿¿ i, t)=α i + β i E (r ¿¿ m ,t) ¿ ¿
Because of the limited space, there are only 5 representative stocks showed below.

2.3 Because a single stock may have greater unsystematic risk, it may cause bias on the relation
between risk and return. In order to diversify the unsystematic risk, we sort the beta we got from
the first regression model, and then split them into 10 groups based on the size. Calculate the
premium return

r p , t−r f , t =α p + β p ( r m , t−r f , t ) + ε i ,t

Then we take the expect value of this equation, we got

 E( r p ,t −r f ,t )=α p + β p E ( r m , t−r f , t )

where r p , t represent the return of the portfolio.

2.4 In the end, we use the data of the third period to calculate the average weekly excess returns of
the 10 portfolios formed by the second phase grouping during the observation period.
69
1
r p , t−r f , t =
T
∑ ( r m ,t −r f ,t )
t=1

By combining β p got from the second stage, we use the model

r p , t−r f , t =γ 0+ γ 1 β p +ε p
to performed a cross-sectional regression analysis to test whether the regression coefficient γ 1 is
significantly zero and whether high systemic risk leads to high expected returns, that is

E ( γ 1 )=E ( r m ,t )−E ( r f , t ) >0