Research On Pricing Validity Of Extented F-F Model—A Study Based On SH Stock Connect

Since the establishment of Shanghai Stock Exchange market and the Shenzhen Stock Exchange market in the 1990 s,it has been evolving for twenty-six years.Today,China's securities market has developed into a multi-level and multi-structure market and it will gradually develop into a mature capital market.Stock markets serve as an indispensable medium for companies to raise money and are becoming an increasingly important part of China's economic system.With government's support,the SH-HK Stock Connect Market has opened and connected the Shanghai Stock Market with the Hong Kong Stock Market.It will gradually promote the development of the Shanghai stock market.The opening of the SH-HK Stock Connect Market widely attracted the attention of scholars.In addition,the study of liquidity risk premium and asset pricing is also one of the main research directions in recent years.This paper is contains research about the effectiveness of asset pricing models in the SH Stock Connect Market.Based on research at home and abroad,this paper studies the liquidity premium effect,the size and value effects in the Shanghai stock marke t,as well as the effectiveness of the Capital Asset Pricing Model(CAPM),F-F three-Factor model and the extended F-F model.This main part of this paper is about the pricing model in the Shanghai stock market in three phases: 1)stocks in the SH Stock Connect Market between 2012/1/1 and 2014/11/17;2)stocks in the SH Stock Connect Market between 2014/11/17 and 2016/9/30;3)stocks in the Shanghai Stock Exchange market without the stocks in the SH Stock Connect Market between 2012/1/1 and 2016/9/30.By studying effectiveness of the asset pricing model in the corresponding market and the effect of the opening of SH Stock Connect Market,the empirical results show that the classical CAPM model can't explain the size effect,the value effect,and the liquidity risk premium effect of the stock market regardless of the opening of the SH-HK Stock Connect Market.Further study shows that the F-F three-factor model can explain the size effect and value effect,but it can't explain the liquidity premium effect.Moreover,The F-F extended model with liquidity factor effectively explains the size effect,value effect and liquidity premium effect.In all,The results showed that: The CAPM model is not suitable,the three-Factor F-F model can only explain the size and value effects,while the extended F-F model can more effectively explain the liquidity premium effect,as well as the size and value effects.Therefore,it is considered that the extended F-F extended model with liquidity factor is suitable for the pricing research of the SH Stock Connect Market.After analyzing the effectiveness of model in the SH Stock Market,the empirical results show that the F-F extended model has the ability to explain the return of stocks and improve the effectiveness significantly.Then,this paper annalyzed the opening of the SH Stock Connect Market,finding that the stock market risk premium is still the most important factor affecting the excess returns of stock.Also,the empirical study shows that the sensitivity of value factor,has increased in the SH Stock Connect Market while the sensitivity of the size factor and liquidity factor decreased,indicating that the book value of the market effect has deeper influence on stocks in the SH Stock Connect Market.Thus,the SH Stock Connect Market promotes value investing and investors focus more on value investing in the SH Stock Connect Market.