A Research Of Size Effect On Chinese Stock Market

Since be found in 1980s,Size Effect has made a great strike on CAPM and Efficient Market Hypothesis,and thus promoted the development of financial asset pricing.Under the frame of CAPM,Fama and French proposed three-factor model that has more ability to explain Anomalies such as Size Effect.We research on Chinese Stock market,to examine remarkable "Size Effect".My research found that both the absolute return and the excess return compare to CAPM show a monotonous reverse change with the total market value,and the small size stock portfolio has a significant excess returns that CAPM can't explain.Thus "Size Effect" is significant.In this paper,we use CAPM and FF three-factor model to explain "Size Effect",and then compare the explanation of the two models.CAPM can explain major changes of stock return,but it can't explain the excess return of small size stock portfolio.Thus "Size Effect" is remarkable.And three-factor model has stronger explanatory power,because it can explain almost the cross section of average returns.Under its interpretation,the small size stock portfolio no longer has significant excess returns.Size factor SMB is the main reason for determining different returns for different market value stock.Finally,we construct a minimum market value strategy for the application of "Size Effect",and carry out a back test for the period of 2003?2016.The cumulative return of the minimum market value strategy is 15184%,which has more return than both benchmark and the stocks with lowest total market value of 10%.Therefore,my paper holds that during the period of 2003?2016,there is a significant"Size Effect" in Chinese stock market,and three-factor model has a stronger explanatory power than the CAPM.In history,the minimum market value strategy can be constructed for the application of "Size Effect".