The Pricing Differences Of Fama-French Five-Factor Model In China's Multi-level Stock Market

The enrichment and development of asset pricing theory is of great significance for portraying investor behavior,depicting the relationship between asset returns and risks,and predicting securities returns in the securities market.In 1993,Fama and French proposed a three-factor model based on empirical evidence from the US stock market.The model argues that the expected return on a portfolio can be determined by the risk exposure of the portfolio to the market factor,the scale factor,and the value factor.Three-factor model explains the scale vision and book-to-market ratio vision in the market from the perspective of rational pricing,and making up for shortcomings of the CAPM model's interpretation of vision.However,with the continuous maturity and development of the capital market,the three-factor model cannot explain the financial ?vision? newly identified by many scholars.In 2015,based on the three-factor model,Fama and French considered the profit and investment vision problems in the market and expanded the three-factor model into a five-factor model.The five-factor model provides a new feasible investment decision-making tool for market participants,and also enriches the research of asset pricing theory,and causes more scholars to identify more risk factors to improve and expand the factor model.With the call for ?mass entrepreneurship and innovation?,the Growth Enterprise Market is increasingly active.According to Eastern Fortune's Choice data,the turnover of the GEM on March 12,2019 has reached 175.57 million,a record high,far exceeding the peak of 61.61 million in 2015.However,there are many hidden problems behind the hot GEM.Problems such as over-raising of IPOs,over-valuation,surplus manipulation,inefficient investment,and irrational speculation by investors are emerging.As a financing place for small and medium-sized private enterprises,the small and medium-sized board market is also very prominent on the issues of earnings quality and investment efficiency.Foreign research shows that the pricing power of the FF factor model will be different due to market efficiency,legal accounting system,maturity of capital market and investor investment philosophy.In China,few literatures have studied the differences in pricing power of FF factor models in multi-level stock markets in China.This paper examines the applicability differences of FF five-factor model in multi-level stock market from the perspective of different market segments in China.And the paper provides empirical evidences that whether the market segment differences cause serious mispricing issues,while using the FF five-factor model to explain the income of China's A-share stocks.This paper uses the monthly yields of individual stocks of A-shares and different level of stock market from May 2011 to October 2018.Referring to Fama and French(2015),this paper tests the applicability of FF five-factor model in each level of stock market in China through the method of time series regression.The results show that:(1)In the stock market of all levels in China,the FF five-factor model can not explain the income of stock portfolio perfectly.There are other common risk factors affecting stock returns in the market.(2)The FF five-factor model has a strong explanatory power for the main-board market portfolios,and this explanatory power is significantly stronger than the three-factor model.But in the Small and Medium Enterprise Board(SME)and the GEM market,after adding RMW and CMA,the model has no significant improvement.(3)In the main board market,the explanatory power of the RMW factor is significantly better than the CMA factor,but it does not show similar characteristics in the SME market and the GEM market.(4)For smaller stocks,the SMB factor is more significant,and this phenomenon exists in all market segments.(5)Although the applicability of the FF five-factor model is different in different market segments,these differences do not lead to more serious mispricing problems when using the A-share full-sample to construct factors to explain the stock returns in different market segments.(6)The five factors of A-shares sample can well replace the five factors of the main board sample,but they can not reflect the scale risk and value risk characteristics of the SME board,and can not reflect the value risk and investment risk characteristics of the GEM market.(7)In the GEM market,the risks associated with investment have different characteristics from other market segments.Finally,considering the research conclusions and the current situation of China's stock market,this paper attempts to make constructive suggestions for the regulatory authorities,institutional investors and researchers.