Analysis of Chinese stock market based on Fama-French five-factor model

Abstract

After almost 25 years of expansion since its founding in late 1990, our stock market has expanded to rank second in the world in terms of market capitalisation. However, the stock market's speculative nature, information asymmetry, and extreme volatility can frequently raise serious concerns. The Fama-French five-factor (FF) model is used in this study to determine the variables affecting stock returns. and compares it to the three-factor model to see which model has a stronger ability to explain stock returns in the A-share market in the People’s Republic of China from the standpoint of asset pricing. The monthly data of A-share listed businesses for a total of 264 months between January 2000 and December 2021 are chosen as the sample in this article. Five factors are built using these data. Additionally, descriptive statistics and correlation analysis are carried out for the Chinese A-share market's five-factor model. The returns of the first four variables for regression are used to explain the returns of the fifth component in a five-factor model redundancy test.Finally, the three-factor intercept model and the five-factor intercept model are then obtained by doing a linear regression on the five-factor model. The results of the empirical test allow for the following inferences: All five factors are significant and have more explanatory power than the three factors since the CMA factor is redundant in the five-factor intercept model and is replaced by CMAO.Significant variables in the three-factor intercept model include MKT ,SMB and HML.