An Empirical Study Of The Value Premiums And CAPM In China Capital Markets

Recently, a large number of empirical studies show that the CAPM is not alwaysgaining the strong support. It is often give rise to many anomalies which are unableto explain. Value premium as one of the most disputable and attractive marketanomalies, has been confirmed it is prevalent in many stock markets of foreigncountries. The so-called value premium is that the stocks with higherbook-to-market value have higher returns than the stocks with lower book-to-marketvalue. However, domestic academic research in this field is still in the relativelyweak state, and the researches are extremely limited.Therefore, based on the expanding in the range of research and volume of samples,this paper intends to use the methods of Fama and French(2005), and collect relativedates of Shanghai stock market and Shenzhen stock market in China from December1994 to December 2005, combining cross-section regressionmethod and econometrictesting means for a more comprehensive empirical analysis which is to researchthe problems as follows: how value premiums vary in China capital markets, howis the validity of The capital asset pricing model explain observed value premiums,and whetherβacross stocks which is independent of book value to market value(orsize) is related to average returns in the way predicted by the CAPM. It is alsodiscuss the comparability with mature capital markets. All of it is not only tocompensate for the lack of previous research, but also provides a theoretical basisfor the decision made by investors and securities regulatory departments.After empirical research, we find that: (1) there is value premium in Chinastock markets on a certain extent, particularly for small size stocks, but notfor large size stocks. (2) The CAPM can explain the value premiums in China stockmarkets from July 1995 to December 2005. From the regression results of sixportfolios formed by size and B/M, it draws the conclusion that allowβchangeswill be a slight increase in the ability that CAPM can explain expected stockreturns, comparing with theβconstant. (3) Only variation inβrelated toB/M(or size) is compensated in average returns, but variation inβunrelated toB/M(or size) goes unrewarded in China stock market.