An Empirical Study Of The Determinants Of Stock Returns In China GEM

This study applied the Fama-MacBeth approach and principle component analysis to the Growth Enterprise Market (GEM) in China, one of the youngest growing markets. The sample period is October 30th 2009 through November 29th 2010. Growth factors, particularly earnings growth, were found to have unique significance in interpretation of equity returns in China GEM, but contrary to findings for most of other markets, the size effect is positive in GEM. It is possible that size factor is positively correlated with the certainty of growth potential. The book-to market ratio was helpful in multi-factor regressions, but again with a surprisingly negative correlation with returns. Market irrationality is likely to play a critical role in the two factors. Trading factors, either representing the liquidity premium, or accounting for the speculative nature of Chinese capital markets, were also tested with high significance. A principle component analysis involving all the above factors was found to have a very high explanatory power. In addition, momentum and reversal effect also exist in China GEM.