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Open Access This content is freely available online to anyone, anywhere at any time.
Date: 26 Jul 2014

The Fama-French Three Factors in the Chinese Stock Market

Abstract

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.

* We thank Agnes Cheng for her encouragement and support. We thank Hai Lu, Ji-Chai Lin, Jing Liu, Charles Lee, Wilson Tong, Jim Ohlson, and participants at the 2013 China Accounting and Finance Review (CAFR) Special Issue Conference for their helpful comments. Shaojun acknowledges financial support by the Hong Kong Government Theme-based Research Project “Enhancing Hong Kong’s Future as a Leading International Financial Center”. All remaining errors are our own.
Jin Xu, School of Accounting and Finance, Faculty of Business, The Hong Kong Polytechnic University; email: jin.xu@connect.polyu.hk. Shaojun Zhang, Assistant Professor, School of Accounting and Finance, Faculty of Business, The Hong Kong Polytechnic University; email:afszhang@polyu.edu.hk.
JEL Classification: G11, G12, G15