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Testing the Validity of the Multi-Factor Model in the Chinese Stock Market
- 1 The Chinese University of Hong Kong,Shenzhen, LongXiang Street 2001, Shenzhen, Guangdong Province, China 518000
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Abstract
In the wake of the burgeoning field of quantitative finance, factor models have risen to considerable prominence within the Chinese financial landscape. This research undertakes a comprehensive analysis employing data spanning the years 2014 to 2022, encompassing a total of 108 monthly observations sourced from the Chinese A-share stock market. The principal objective of this study revolves around the evaluation of the effectiveness of an array of common factors. These factors include the market risk premium, market value, book-to-market ratio, profitability, investment, momentum, and liquidity factors. Moreover, our inquiry extends beyond the conventional boundaries of the Fama-French three-factor and five-factor models. It introduces the pivotal elements of momentum and liquidity factors, effectively formulating an enriched model poised to offer a more robust framework for understanding and explaining returns. The discerned findings shed valuable light on the model configurations most apt for dissecting the excess returns exhibited within the sample stocks. Notably, the amalgamation of the three-factor model with the strategic incorporation of the liquidity factor emerges as the most comprehensive explanatory model for the observed excessive returns in the context of the Chinese A-share stock market. It is important to highlight that the introduction of the momentum factor, while explored, does not impart a significant augmentation in the model's capacity to clarify excess returns, a noteworthy departure from expectations within the Chinese A-share market. These insights not only advance our understanding of the Chinese financial landscape but also underscore the intricate dynamics at play in the realm of quantitative finance.
Keywords
Asset pricing model, multi-factor research, quantitative finance
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Cite this article
Shen,Y. (2024). Testing the Validity of the Multi-Factor Model in the Chinese Stock Market. Advances in Economics, Management and Political Sciences,70,248-258.
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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Volume title: Proceedings of the 2nd International Conference on Financial Technology and Business Analysis
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