Can the Industry Index Become Another Market Variable? Empirical Evidence from the Listed Banks in Shanghai Stock Exchange

To identify the variables that explain the rate of return of stock, Sharpe developed a simplified single-index model in 1963, and thereafter more models, such as multi-factor model, were constructed to explain the relationship. According to common sense, we can find the common movement of stocks prices in the same industry. Several researchers have found and examined it. In this paper, we construct a new model, which we call the double-index model and introduce a new market variable, which is called the industry index. Through comparison of Adjusted R Squares and correlations of residuals across the bank stocks between the single-index model and the double-index model, we find the industry index improve the explanation power of the model.