Empirical Evidence Of Fama-French Three Factor Model And Improved Model In China's A-stock Market

Valuations on assets are an important subject in finance field. With the development of the stock market, so many kind of the theory of valuation have come out. Eugene Fama and Kenneth French designed a model called Fama–French three-factor model, they used two new variable to describe the returns of a portfolio, they thought the value of a cops and Price-to-Book ration are two useful factors, and so in many countries' securities market. The model is used in valuation or risk management and so on.The development of China's securities market has a short time. Some rules of China's securities market are very different from western country. In China, whether the theories which born in western countries are suitable China's securities market? That's what we concerned about. We analysis on application of Fama–French three-factor model in China security market, and compare to CAPM to determine which is better to explain stock returns. Finally we try to find some new factors to improve Fama–French three-factor model.We choose almost all corps of Shanghai and Shenzhen security market. We use stocks' week data from 2008 to 2015. According to the same method which Fama and French used, we try to use Fama–French three-factor model to explain China's security market's return with more precise company's market value and Book-To-Market value. We confirmed that in China, big caps have better returns than small caps, and so are low Price-to-Book ratio companies. The goodness of fit test for Fama–French three-factor model seems good, but the significance of coefficients is not as perfect as other findings. We also use different period to check if the coefficients are stable. In the following research, we try to find the impact of volume factor and turnover rate factor to portfolio's returns. We consider turnover rate factor is a useful factor to improve Fama–French three-factor model.Finally we got some results. First there are two classes of stocks have tended to better than market as a whole: big company and stocks with a low Book-to-Price ratio. Second Fama–French three-factor model is much better than CAPM in using in China's securities market. Third turnover rate is helpful in explain the return of stocks.