Empirical Research On Asset Pricing Based On Contrarian Effect In China’s Market

The capital asset pricing theory is one of the three core propositions of modern finance. Arbitrage factor pricing model,a branch of the pricing model, has been widely tested and applicated. The classical pricing models, however, need to be tested before applied to China’s market, because there is a big gap between China’s stock market and mature markets in Europe and the United States. China’s market is regarded as a "policy-driving market" and "retail market”. Chasing hot topics is the main melody of the investment market and the historical performance of the stock has more important than financial statements information. The research on China’s market of momentum and contrarian effect provides a good research idea to correct factor pricing models.In this paper, we use the data of stock prices and financial ratios in Shanghai Stock Exchange from January 2011 to December 2015 to exam the momentum and contrarian effect by building ultra-short-term, short-term and midterm momentum factorsbased on Carhart long-term momentum factor.After that, the author divide the data in six groups according to the size and book to market value ratio and exam several different models, including the Fama-French three factor model, the Carhart momentum four factor model, the Fama-French five factor model and relevant modified models.The empirical results show that China’s market has a significant ultra-short-term contrarian effect. It is also better to build the four factor modelwith ultra-short-term momentum factor, other than short medium or long term momentum factor model. Meanwhile, the substitution of profitability factor with ultra-short-term momentum factor increasethe significance of other factors in Fama-French five factor model. The applicability of the modified four factor model and the five factor model, constructed with the factor revealing the ultra-short term contrarian effect, are better than the classical models widely used.