Comparison of China Three-factor model and Fama-French Three-factor: An Empirical Analysis

Research Article
Open access

Comparison of China Three-factor model and Fama-French Three-factor: An Empirical Analysis

Xingyue Ding 1* , Kaihong Xie 2
  • 1 Southeast University    
  • 2 Jinan University-University of Birmingham Joint Institute    
  • *corresponding author 213202948@seu.edu.cn
Published on 13 September 2023 | https://doi.org/10.54254/2754-1169/14/20230810
AEMPS Vol.14
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-915371-71-3
ISBN (Online): 978-1-915371-72-0

Abstract

Fama-French factors model (FF-3) is a famous model derivate from CAPM to explain the stock return. However, in China, in consideration of A-shares, a more suitable model for Chinese market is in need, thus a China three-factor model (CH-3) was constructed. There was no doubt that China three-factor model dominated Fama-French three-factor model from 2000 to 2017. Nevertheless, in recent year, due to the COVID-19 and the change of world situation, China Stock Market had also changed. In this paper, we tried to use our knowledge and extended the data to 2021 to test the effectiveness of each model. According to the analysis, the effectiveness of Fama-French factors model is almost equivalent to China three-factor model in recent year based on the data validation, while China model can still dominate Fama-French model if one includes the data since 2000. Overall, these results shed light on guiding further exploration of model selection for assets evaluations.

Keywords:

CH-3, FF-3, factors model, effectiveness

Ding,X.;Xie,K. (2023). Comparison of China Three-factor model and Fama-French Three-factor: An Empirical Analysis. Advances in Economics, Management and Political Sciences,14,162-168.
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References

[1]. Berk, J. B.: Sorting Out Sort. The Journal of Finance, February, 2000, (2000).

[2]. David, B.: How to navigate the equity ‘factor zoo’, 2020, https://www.robeco.com/en/insights/2020/03/how-to-navigate-the-equity-factor-zoo.html (2020).

[3]. Hou, K., Xue, C., Zhang, L.: Digesting Anomalies: An Investment Approach. Working Paper Series, (2012).

[4]. Omar, T., Samir, A., Jawad, A.: A Comparative Study of the Fama-French Three Factor and the Carhart Four Factor Models: Empirical Evidence from Morocco. International Journal of Economics and Financial Issues, Econjournals, vol. 12(1), pages 58-66 (2022).

[5]. Eugene, F. F., Kenneth, R. F.: A five-factor asset pricing model. Journal of Financial Economics, Volume 116, Issue 1 (2015).

[6]. Chen, L., Novy-Marx, R., Zhang, L. An alternative three-factor model. Available at SSRN 1418117 (2011).

[7]. Zhang, J.: Analysis of three-factor pricing models for stock return. Dissertation of Zhejiang University (2019).

[8]. Xu, J., Zhang, S.: The Fama-French Three Factors in the Chinese Stock Market. Chinese Accounting and Financing, 16(002):210-227 (2014).

[9]. Allen, F., Qian, J., Qian, M.: Law, finance,and economic growth in China. J. Financ. Econ. 77(1), 57-116 (2005).

[10]. Zhang J. The Fama-French three factors in Chinese stock market. Chinese Accounting and Financing, 2014, 16(2):18 (2014).

[11]. Liao, L. Shen, H. B.: Fama-French Three Factors Model and the Effect of the Split-share Structure Reform’, The Journal of Quantitative and Technical Economics 9: 117-125 (in Chinese) (2008).

[12]. Liu, G. M., Yang, C.: Application of Fama-French Multi-factor Model in China’s Bond Market during Recent Financial Crisis’, Journal of Zhejian University (Science Edition) 4: 396-400 (in Chinese) (2010).

[13]. Liu, J., Stambaugh, R. F., Yu, Y. Size and Value in China. NBER Working Papers, (1), 2018.

[14]. Fama, E. F., and Kenneth, R. F.: Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56 (1993).

Cite this article

Ding,X.;Xie,K. (2023). Comparison of China Three-factor model and Fama-French Three-factor: An Empirical Analysis. Advances in Economics, Management and Political Sciences,14,162-168.

Data availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

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About volume

Volume title: Proceedings of the 2nd International Conference on Business and Policy Studies

ISBN：978-1-915371-71-3(Print) / 978-1-915371-72-0(Online)
Editor：Canh Thien Dang, Javier Cifuentes-Faura
Conference website: https://2023.confbps.org/
Conference date: 26 February 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.14
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Berk, J. B.: Sorting Out Sort. The Journal of Finance, February, 2000, (2000).

[2]. David, B.: How to navigate the equity ‘factor zoo’, 2020, https://www.robeco.com/en/insights/2020/03/how-to-navigate-the-equity-factor-zoo.html (2020).

[3]. Hou, K., Xue, C., Zhang, L.: Digesting Anomalies: An Investment Approach. Working Paper Series, (2012).

[4]. Omar, T., Samir, A., Jawad, A.: A Comparative Study of the Fama-French Three Factor and the Carhart Four Factor Models: Empirical Evidence from Morocco. International Journal of Economics and Financial Issues, Econjournals, vol. 12(1), pages 58-66 (2022).

[5]. Eugene, F. F., Kenneth, R. F.: A five-factor asset pricing model. Journal of Financial Economics, Volume 116, Issue 1 (2015).

[6]. Chen, L., Novy-Marx, R., Zhang, L. An alternative three-factor model. Available at SSRN 1418117 (2011).

[7]. Zhang, J.: Analysis of three-factor pricing models for stock return. Dissertation of Zhejiang University (2019).

[8]. Xu, J., Zhang, S.: The Fama-French Three Factors in the Chinese Stock Market. Chinese Accounting and Financing, 16(002):210-227 (2014).

[9]. Allen, F., Qian, J., Qian, M.: Law, finance,and economic growth in China. J. Financ. Econ. 77(1), 57-116 (2005).

[10]. Zhang J. The Fama-French three factors in Chinese stock market. Chinese Accounting and Financing, 2014, 16(2):18 (2014).

[11]. Liao, L. Shen, H. B.: Fama-French Three Factors Model and the Effect of the Split-share Structure Reform’, The Journal of Quantitative and Technical Economics 9: 117-125 (in Chinese) (2008).

[12]. Liu, G. M., Yang, C.: Application of Fama-French Multi-factor Model in China’s Bond Market during Recent Financial Crisis’, Journal of Zhejian University (Science Edition) 4: 396-400 (in Chinese) (2010).

[13]. Liu, J., Stambaugh, R. F., Yu, Y. Size and Value in China. NBER Working Papers, (1), 2018.

[14]. Fama, E. F., and Kenneth, R. F.: Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56 (1993).

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