Research On The Market Applicability Of Fama-French Three Factor Model

The Fama-French three factor model has always been concerned by scholars as the basis of many capital pricing derivation models.At present,a large number of literatures have been used to study Chinese capital market with three factor models,which are mainly focused on testing the applicability of the three factor model in Chinese market.The conclusion of some scholars is that the three factor model is suitable for Chinese market,but there is a significant difference between size effect and book-to-market effect.Some scholars also concluded that neither of them is significant,and the three-factor model is not applicable to the Chinese stock market.Scholars often only give conclusions,or extend the three-factor derivative model(for example,the four-factor model)with stronger explanatory power to stock returns by adding other factors,and do not delve into the reasons that affect the market applicability of the three-factor model.In addition,most of the scholars selected stock data that is 5 years ago for research,and the stock market has undergone rapid changes.In particular,the operation of Shanghai(Shenzhen)-Hong Kong Stock Connect has brought unprecedented heights to the connectivity between the mainland and Hong Kong stock markets.The entire stock market has undergone major changes in the direction of capital flows and investment styles,and the data from 5 years ago is obviously lagging behind.At present,few scholars empirically analyze the applicability of the three-factor model after interconnection and interoperability between the Mainland and the Hong Kong stock market.Especially since the opening of Shenzhen-Hong Kong Stock Connect was relatively late,more studies focused on policy analysis and theoretical combing.Few literatures used the stocks after opening as an example to conduct empirical research.Therefore,this paper empirically tests the applicability of the three-factor model before and after the opening of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect to try to find out the reasons that affect the market applicability of the three-factor model.This article draws on the research of existing literature and divides the sample stock into 25 groups according to the circulation market value and the book-to-value,and calculates the monthly weighted return rate of each group by taking the circulation market value as the weight,and subtracts the risk-free rate of return for the corresponding month to obtain the monthly excess return of the portfolio.The author obtains the three-factor data from the CSMAR database for the study period,and regresses the yield of 25 combinations and three factors.By analyzing the changes of a value and R-square,the applicability of the three factor model is tested,that is,whether it can explain the return rate of the stock portfolio well and analyze the changing rule of its sensitivity coefficient.By comparing the empirical test results before and after the opening of Shanghai(Shenzhen)-Hong Kong Stock Connect,the factors affecting the market applicability of the three-factor model will be further explored.The study found that the opening of the Shanghai-Hong Kong Stock Connect increased the explanatory power of the three-factor model on the yield of the stock portfolio.After the opening,the explanatory power of the size factor decreased.In particular,the explanatory power of the size factor of the low market capitalization group was reduced,and the book-to-market ratio factor analysis ability was improved.In particular,it has improved the high book value of the market compared to the group's explanatory power.The reason for this is that Hong Kong investors will pay more attention to stocks with larger market capitalization and higher book-to-market ratios when investing.The opening of Shenzhen-Hong Kong Stock Connect has reduced the market applicability of the three-factor model,and the explanatory power of market risk factors and book-to-market ratio factors have declined.This study considers that market investment style is the main reason for this difference.Finally,based on the results of empirical research,relevant suggestions are made for further development of Chinese capital in the process of opening up.