Does the Factors Model Perform Well in Emerging Market? - the Empirical Evidence of China Stock Market.

EasyChair Preprint 1910

Abstract

The most famous asset pricing models, Fama and French 3factor(1992, 1993, 1996)  and 5 factor(2015) model, in the past few decades were applied in many countries. The U.S. (developed financial markets) country-specific additional 2 factors in the 5-factor model, RMW and CMA or profitability premium and investment premium, empirically cannot further capture the return variation of classic 3 factors/chrematistics in China (developing financial markets ) stock market. Therefore,  the classic 3-factor has better performance than the 5-factor model in China. We do not presume that firms in different countries share same features. Following the Liu, Stambaugh and Yuan(2019), we replace the book-to-market ratio to earning-to-price ratio(EP ratio). By using Shanghai and Shenzhen exchange stocks, we find out the redundancy of HML only in the 5-factor model. In the Fama MacBeth regression, the SMB and HML are significant factors in three factor model for explaining the China return variation.

Keyphrases: Anomalies, China, Investment, Profitability, Three and Five factors, size, value

@booklet{EasyChair:1910,
  author    = {Yichi Zhang and Selma Izadi and Mohammad Kabir Hassan},
  title     = {Does the Factors Model Perform Well in Emerging Market? - the Empirical Evidence of China Stock Market.},
  howpublished = {EasyChair Preprint 1910},
  year      = {EasyChair, 2019}}