The Multifactor Pricing Model And Its Applications In China's Stock Market

The multifactor pricing model is a crucial breakthrough in asset pricing theory and a derivation or an extension of the arbitrage pricing theory (APT). After conducting an empirical research on the stock market in US, Fama and French (1992) established the famous three-factor pricing model (the FF model) and thought that the size- and value-factor can interpret the variation in stock returns with market-factor in capital asset pricing model (CAPM). There is a flourishing research literature contradicting, confirming, criticizing, and extending the FF model. Many worldwide economists examined the explanatory power of the FF model in other stock markets. Thought on the trade-off between risk and payoff evolves more and there is a significant combination of the research on the multifactor pricing model and the practice of financial management. There exist few standard databases in China's stock market. We summarize an empirical result of the FF model about the China market based on CSMAR (China Stock Market & Accounting Research Database), which implies that the great dispersion in returns of stock correlates strongly with the firm's size-factor and value-factor.