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Troy Feb 18, 2018
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Fama-French Five Factor Model in China Stock Market

Author: Guofeng Zhang

Mentor: Linsen Yin

Abstract:This paper firstly focus on the application of Fama-French five factor model in Chinese stock market, by sampling A-share listed firms for the period from July 1995 to December 2017. The explanatory power of each factor is explored by the redundancy test and regression analysis. The validity of the three-factor model and the five-factor model are tested by GRS test and three measures of regression intercept term proposed by Fama & French (2015). Then, using the time of Split-share structure reform as the cut-off point, we repeat the above tests for the sample periods and compare the change of the capital market efficiency before and after Split-share structure reform.

Our main conclusions are:(1)market risk effect and size effect are significant, when profitability effect remains but investment effect depends on the way of building factors after three-factor adjustment in all sample test;(2)be same as the international experience, five-factor model performs better than three-factor model in Chinese stock market;(3)market risk dominates before Split-share structure reform, but it can be explained by other factors after Split-share structure reform;(4)whether profitability factor are significant depends on the way of building factors no matter with before and after Split-share structure reform;(5)investment factor is both redundant before and after Split-share structure reform;(6)the excess return is more close to zero after Split-share structure reform, which means capital market tends to be more effective. This research provides reference for asset pricing research.

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