The Fama-French Three Factors in the Chinese Stock Market
China is the largest emerging market and attracts a great deal of attention from investors and researchers worldwide. The Fama-French three-factor model is the outcome of decades of research on US stock returns. To what extent the three factors explain the variation in Chinese stock returns is an intriguing question. This paper documents empirical evidence on this issue and identifies some pitfalls that arise in the application of the three-factor model to Chinese stock returns. We find that several special features in China affect the three factors considerably and also influence the explanatory power of the three-factor model.
- Asness, S. C., Frazzini, A., and Pedersen L. H. (2013), ‘Quality Minus Junk’, Working Paper, available at SSRN: http://ssrn.com/abstract=2312432.
- Campbell, J. Y. (2000) Asset Pricing at the Millennium. Journal of Finance 55: pp. 1515-1567 CrossRef
- Campbell, J. Y., Lo, A. W., MacKinlay, A. C. (1997) The Econometrics of Financial Markets, Princetown. Princeton University Press, NJ
- Chen, N-F., Roll, R., Ross, S. A. (1986) Economic Forces and the Stock Market. Journal of Business 59: pp. 383-403 CrossRef
- Chen, Z-H. (2004) Cross-sectional Variations and Three Factors Asset Pricing Model: Empirical Evidence from China A-Share Market. Chinese Journal of Management Science 6: pp. 13-18
- Connor, G., Korajczyk, R. A. (1988) Risk and Return in an Equilibrium APT: Application of a New Test Methodology. Journal of Financial Economics 21: pp. 255-289 CrossRef
- Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences (2013), ‘Understanding Asset Prices’, Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
- Fama, E. F., French, K. R. (1992) The Cross-section of Expected Stock Returns. Journal of Finance 47: pp. 427-465 CrossRef
- Fama, E. F., French, K. R. (1993) Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics 33: pp. 3-56 CrossRef
- Lehmann, B. N., Modest, D. M. (1988) The Empirical Foundations of the Arbitrage Pricing Theory. Journal of Financial Economics 21: pp. 213-254 CrossRef
- Liao, L., Shen, H-B. (2008) Fama-French Three Factors Model and the Effect of the Split-share Structure Reform. The Journal of Quantitative and Technical Economics 9: pp. 117-125
- Linter, J. (1965) The Valuation of Risky Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics 47: pp. 13-37 CrossRef
- Liu, G-M., Yang, C. (2010) Application of Fama-French Multi-factor Model in China’s Bond Market during Recent Financial Crisis. Journal of Zhejiang University 4: pp. 396-400
- Mao, X-Y., Chen, M-G., Yang, Y-H. (2008) Long-run Return Performance following Listed Rights Issue: Based on the Improved Three-factor Model. Journal of Financial Research 5: pp. 114-129
- Merton, R. C. (1973) An Intertemporal Capital Asset Pricing Model. Econometrica 41: pp. 867-887 CrossRef
- Ross, S. A. (1976) The Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory 13: pp. 341-360 CrossRef
- Sharpe, W. (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance 19: pp. 425-442
- The Fama-French Three Factors in the Chinese Stock Market
- Open Access
- Available under Open Access This content is freely available online to anyone, anywhere at any time.
China Accounting and Finance Review
- Online Date
- July 2014
- Online ISSN
- The Hong Kong Polytechnic University
- Additional Links
- Chinese Stock Market
- Non-Tradable Shares
- Three-Factor Model
- Value Premium