An Empirical Research Of The Size Effect In Chinese Stock Market

This paper exams the validity of Capital Asset Pricing Model in Chinese stock market and an CAPM anomaly,the size effect.The CAPM passed the α-test but failed in our predictivity test and multifactor test,which reject the validity of the CAPM in Chinese market.Based on our portfolio analysis and Fama-MacBeth cross-sectional regression analysis,we find that small firms have higher risk-adjusted expected return than large firms,consistent with former researches in other markets.This phenomenon is so-called the size effect.Following our empirical results,this paper discussed potential explanations of the size effect proposed by academics.Then based on this,I tested explanation power of macroeconomic risks and the neglected-firm effect on the size effect but the results show no significant relation between them.The explanation of the size effect is still unclear.