An Applicability Research Of Q-three Factor Asset Pricing Model In The Chinese Stock Market

Traditional asset pricing models like Fama-French three factor model and CAPM have been increasingly challenged recently. It has become clear that even the extremely influential Fama-French models fails to explain a wide range of cross-section anomalies. Chen, Novy and Zhang propose a new multifactor investment-based asset pricing model based on the Q-theory, which performs very well in USA. There are a few researches about it in China now, and the empirical results are not very good. Is the Q-three factor model suitable for Chinese stock market? The paper tries to answer the question by improving the empirical condition.Taking into account the far-reaching impacts of the non-tradable shares reform in Chinese stock market, and the different market structures of the Shanghai Stock Market and the Shenzhen Stock Market, the sample data after the completion of the non-tradable shares reform are separated from the Shanghai Stock Market and the Shenzhen Stock Market. These two considerations are verified in the following empirical results.In the paper, the Q-three factor model is tested with testing deciles sorting by anomaly variables including asset growth, earning surprise, etc., which first introduced by Fama-French. At the same time, CAPM and Fama-French three factor model were tested respectively in the Shanghai Stock Market and the Shenzhen Stock Market, with the same testing deciles to compare the performance of the three different asset pricing model.The empirical results shows that the performance of Q-three factor model in explaining the stock anomalies, like asset growth, earning surprises, etc., is better than Fama-French three factor model, and it’s performance in the Shenzhen Stock Market is much better than that in the Shanghai Stock Market.The performances in the Shanghai Stock Market and the Shenzhen Stock Market were different, because the listed companies on the Shanghai Stock Market were mainly the large-size state-owned enterprises, but the small and medium-sized private enterprises were mainly listed in the Shenzhen Stock Market. Compared with the state-owned enterprises, the private enterprises are less influenced by the policy and they can make more rational investment decisions, which is the basic condition of the Q-three factor model.And considering the model’s perfect performance and its economic intuition based on the Q-theory, the Q-three factor model can be used to obtain expected return estimates in practice after more successful tests of anomalies effects.