Study Of Conditional Asset Pricing Model And Pricing Factors

The efficient market hypothesis (EMF) holds that asset prices correctly reflect market information. Asset pricing theory has developed rapidly due to the effectiveness of the market price. However, traditional asset pricing model cannot explain the financial anomalies, so people began to suspect the validity of the model and EMF. The EMF supporters argue that the reason why asset pricing model cannot explain the cross-sectional return is not because the hypothesis failure but the unconditional pricing models ignore the dynamic changes of risk. The analysis of asset pricing model has shift to the time-varying conditional model gradually.This paper has sequentially compared the CAPM and Fama-French three factors model, unconditional asset pricing model and conditional model, nonparametric estimation methods and rolling window estimation method in China’s stock market. We found the conditional three factors model can explain the ’Size effect’ and ’Value effect’ which CAPM fails to explain. Through the jointly test of pricing errors, we prove the conditional three factor model holds in the China’s stock market. Pricing error of conditional model is significantly smaller than the unconditional one, which means that three factors perform better in explaining the differences of cross-sectional return when the model capturs the dynamic risk. We discuss the characteristics of long run and time varying loading, analyze the sensitive coefficient differences among portfolios, which explores the specifics of time varying risk exposure among different portfolios.This paper does not end in studying the systematic relationship between factor loadings and excess returns. Moreover, we identify the risk types of three-factor loadings. Through the Fama-MacBeth test we found that market factor and value factor as pricing factor has significant market premium, the corresponding system risk determines the price of the portfolio. However, the value factor is only caused by the idiosyncratic risk and the market will not always compensate for it.