A Study On Stocks’ Excess Return In China’s Gem Market

Since 1990,China’s securities market has already became the second largest stock-trading market in the world.However,as it has only developed for 26 years,there still exists lots of weak points that are need to be improved.The bad environment and market system always impede scholars to study for China’s securities market.Fortunately,we can learn from foreign market’s experience.The article has used Fama and French’s five-factor model to analyze China’s Growth Enterprise Market and try to explain stocks excess return in this market as well as the effects of the liquidity factor.Fama and French’s five-factor model was proposed form three-factor model,a theory also was brought by Fama and French in 1993.This article has introduced the five-factor model and the overviews of scholars’ studies on stocks’ profit.With the five-factor model,this article has selected from May 2011 to April 2016 in the GEM market and calculated Market-SMB-HML-RMW-CMA as well as the LMI(liquidity factor).After the calculation,the article put all the factors in to the five-factor model and do the regression of the model.From the group dividing,we find that in China’s GEM market,there also exist “small-firm effect”: a company with small market value usually has a high stock profit.However,different with other people’s studies,we find that a company in small size of book-to-market is more likely to get a high stock profit,which is much stronger than the “small-firm effect”.And for other two factor in five-factor model,the investment factor is also seemed to have a premium effect for a company with high level of total assets growth rate.However,it seems that the revenue factor has little effect on China’s GEM market.This article also has analyzed the liquidity factor and finds that a company with high stock turnover will lead to higher stock profit or heavier loss.From the model regression,we believe that for China’s GEM market,except the market factor (R_m-r_f),the market value factor (SMB) and the book-to-market factor (HML) are still the strongest factors to explain stocks’ excess return rate.The liquidity factor and investment factor can also do the interpretation to some extent while the revenue factor cannot suit for the market.