Empirical Evidence For Fama-French Three-Factor Model In Domestic Securities Market

Since 1980s, the Capital Asset Pricing Theory based on Efficient Market Hypothesis has been challenged by much empirical evidence. The so called anomalies on the security market including Size Effect, Value Premium, Calendar Effect, Reversal Behavior and so on, has brought a serial of revolutions to the field of financial asset pricing theory. According to EMH, who holds the opinion of price as a proxy for all the information available on the market, the difference among portfolios are attributed to various risk factors underlying different capital assets. Higher risk exposure brings with it higher return for certain.Under the frame of rational pricing theory, the risks of investments include Market Factor, Size Factor and Value Factor, according to Fama and French three-factor model. The risk of the movement of all stock prices is revealed through Market Factor. Size and Value Factor tell us respectively that small companies and companies with high BE/ME will bring higher returns.As advanced foreign capital markets, Size and Value Premium exist in domestic market from the empirical evidence of securities markets in Shanghai and Shenzhen from 1995:5～2005:4. Although the zero hypotheses can't be rejected in the test of CAPM, it only explains parts of the cross section of average returns.Through the analysis of the risk underlying Size and Value Factors, capital returns differ a lot among different portfolios, which are formed by ME and BE/ME. What's more, these differences exist at least two years before and after the grouping time. Based on this phenomenon, SMB and HML can both be viewed as risk proxies.The application of FF three-factor model in domestic market is tested. In most cases, we can't reject the zero hypotheses according to the regression result. The three-factor model has the ability to explain the cross section of returns of domestic stocks.