Empirical Asset Pricing Models: Evidence from the Chinese Stock Market

Abstract

This study constructs conventional asset pricing models including the CAPM, the Fama and French three-factor model (FF3 hereafter), the Carhart four-factor model (FFC4 hereafter), and the Fama and French five-factor model (FF5 hereafter). Additionally, a six-factor model (FF5 model augments the Carhart momentum factor) is also constructed and it outperforms other conventional asset pricing models in the Chinese stock market while explaining the returns variation of cross-sectional indices and individual stocks. However, the explanatory power of models varies in explaining indices and individual stocks because of their own specificity. The models can capture most at 69.05% and least at 3.03% of the variation of the return in certain individual stocks. In light of indices, models account for the largest proportion of the variation of the return at 96.83% and the smallest proportion at 85.28%. Moreover, the predictive ability of the six-factor model is confirmed in this study, which implies the validity of constructed factors and the model.