Capital Asset Pricing Theory And Empirical Research On China's Stock Market

Capital asset pricing, especially the relationship between average return and risk, is an important issue of financial thoery. This paper does empirical research about the theory of Capital asset pricing on China's security market, to provide some advice on how to understand the pricing of stocks and how to make more effective strategy of investment. The data for this study are monthly percentage returns for all common stocks traded on Shanghai Security Exchange during the period January 1995 through December 2004. The Fama-MacBeth regression approach and the Fama-French regression approach are used to test the relationship between expected return and risk. The purpose of this study is to analyze the time-varying characters of Beta coefficient in different time intervals, to find out if the Capital Asset Pricing Model (CAPM) is effective in Shanghai market during the period January 1997 through December 2004. Our results show that the transition from over-speculative during the period January 1997 through December 2000 to over-conservative during the period January 2001 through December 2004, happen in Shanghai market. The investors' attitude from risk loving to risk aversion, indicates the development of security market. But in the last time interval, risk premium is negative, which shows the effective return-risk tradeoff hasn't been formed on Shanghai security market. Combined with the characters of China's capital market, which are the poor credit of the financial information, the obvious fluctuation of investors' expectation, the incomplete equilibrium of market's demand and supply, and the growing of investors, this paper is trying to find out other factors, the market information, investor's expectation and the capital market structure and so on, different from that of the CAPM, which influence the pricing of common stocks, and provide some advice and strategy on China's security market. The theoretical research and empirical results will have active and important influence on the future development of China's Capital market.