A Five-factor Stock Pricing Model In Chinese Stock Market

Fama and French(2015,FF hereafter)have improved their three-factor model with another two factors,profitability and investment.They find out there exist profitability and investment effects in the US stock market.This paper examines the performance of the FF five-factor model in the Chinese stock market based on A-share market data from 1997 to 2015.We further aim to find out an asset pricing model which works well in the Chinese stock market.The results show that there is a significant size effect in the A-share market,but no significant value effect,as well as the investment and the profitability effects.Among those portfolios constructed on the size and B/M value,the FF three-factor model performs well.However,for those portfolios constructed on other characteristics,such as profitability and investment,the FF five-factor model has a much better performance than that of the FF three-factor model in the A-share market.As the Chinese stock market has its own particularity,there exist other financial anomalies in the A-share market,such as trading volume effect,turnover effect,etc.We construct test portfolios based on the trading volume and turnover rate,and find out that the FF five-factor model cannot explain the returns of these portfolios well.Instead,a new five-factor model,which adds the volume and the turnover factors into the FF three factors,performs better empirically and has a more general adaptability in the A-share market.However,we find out that volume factor is a redundant variable when it is exposed to other four variables.Thereafter,we proposed two new models in Chinese market.Model 1 replace volume factor V_HML by V_HMLO,trying to solve the multi-collinearity;Model 2 is a four-factor model by dropping volume factor V_HML,the regression results show that both of them are suitable in Chinese market.