| Summary: | Chinese stock market has been growing at a rapid rate since the establishment, and has become the second worldly largest stock market. This study aims to provide a better understanding of the applicability and explanatory power of the Fama-French three-factor model and the Fama-French five-factor model in Chinese stock market. In order to achieve this objective, these two asset pricing models are examined and compared on the basis of Chinese A-share stocks during the period of 01/2010 to 12/2017. Annual financial data and monthly stock market data of A-share listed companies are used.
Empirical evidence in this study shows that the Fama-French five-factor model performs better than the Fama-French three-factor model, although it still cannot fully describe the average returns in Chinese stock market. In addition, the factor spanning test suggest that the size factor, the value factor and the profitability factor are robust, in contrast to the weak market effect and investment effect in Chinese stock market.
This study also compares the factors constructed by different methods, i.e. the 2×3 method, the 2×2 method as well as the 2×2×2×2 method; the result shows that the 2×2×2×2 factors produce a slightly better description than the other two versions of factors.
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