The Three Factor Model Of Empirical Research In Shanghai And Shenzhen A Shares Market

Until now, Fama-French three-factor model has been widely accepted in all over the world. The model is used for returns prediction, risk management, fund performance measurement and so on.China’s stock market was born later than western countries for hundreds of years. So it is full of speculations, information asymmetry, false information and so on, which is natural in developing stock markets. Since Fama-French three-factor model is created based on western mature stock markets, the model’s adaption in China’s stock market is debatable. Early scholars had done some studies, but they get different results. In this paper, we employ expanded samples, which includes all listed companies in China’s A share stock market(except GEM stocks), and adopt return data from1995to2011. In a conclusion, we prove that Fama-French three-factor model is applicable in the China’s stock market.Besides, we get close to the analysis of the Fama-French three-Factor’s coefficients. We find the following conclusions:(1)SMB’s coefficient s and HML’s coefficient h are ranking stable for multiple periods. But market factor’s coefficient b is not as stable as SMB’s coefficient s and HML’s coefficient h.(2)The market factor’s coefficient b is mostly positive. So it is very hard to use market factor to diversify risks, since shorting securities are not easy in China’s stock market. But we can use factors, SMB and HML, to diversify risks.(3)Daily data is more stable than monthly data.(4)Specially for the factors, SMB and HML, increasing the number of securities in the portfolio can add stable to factors’coefficient.(5) In the ranked coefficient portfolios, the coefficient towards the mean value. The highest coefficient portfolio declines most and ranks in the same order for the successive period.