Empirical Research On The Efficiency Of The Fama–French Three-factor Model In The A-share Market Of The Shanghai Stock Exchange

In modern financial research,applying asset pricing models with high level of explanatory power to improve the efficiency in the evaluation of risk,portfolio return and other comprehensive assessment has increasingly becoming the key subject of financial academic circles.Among them,the Fama-French Three-Factor Model developed from the Capital Asset Pricing Model("CAPM")is one of the most widely used in the field.In view of the rapid changes witnesses by China's securities and financial market as it's going through constant development and reform,adopting the latest empirical data to perform the test of applicability of relevant economic models bears significant meanings not only for China,but also for the entire economic world.This paper examines and compares the CAPM and Fama-French Three-Factor Model in the Shanghai Stock Exchange(SSE)by means of empirical time-series regression analysis on goodness of fit,applicability and explanatory ability in order to test the validity and efficiency of the Three-Factor Model in China's financial and securities market.The data of the variables involved are taken from the monthly data of the A-share market in the Shanghai Stock Exchange from January 2008 to December 2017,thus providing adequate and effective supportive empirical data for the test.Taking into consideration of the unique situation of the financial and securities market in China,this study also examines the efficiency of the models under two weighting systems: circulation market-cap weighted(CMCW)and total market-cap weighted(TMCW)so as to reflect the impact of non-circulating shares on the regression results.The results of this study provide strong evidence for the size effect but not for the value effect in the SSE.In general,the Fama-French Three-Factor Model,with size factor(SMB)and value factor(HML)being added in to work with market factor,showed improved efficiency in higher goodness of fit,more significant slopes,less significant intercepts,less presence of heteroskedasticity,etc.which indicates that the Three-Factor Model significantly improves in its explanatory ability on the excess returns of A-share in SSE,and thus proves significant improvement in applicability and efficiency.Study also finds that the models perform better under CMCW than TMCW,indicating that non-tradable shares have an impact on the Three-Factor Model's efficiency in the SSE.In conclusion,although the Three-Factor Model still shows some room for adjustment and improvement under the empirical analysis of the SSE,the regression test results generally show that the model has good applicability in China's securities market.