Fama-French-factor model, size and book-to-market effect: An empirical investigation of the Chinese stock market

SONG Chen

Albert-Ludwigs-University of Freiburg, Germany

Institute of Economics, Faculty of Economics and Behavioral Sciences
Abstract:

In this study, we use Chinese A-share stock market data from 1995 to 2005 to test the persistence of the size and value effect and the robustness of the Fama-French three-factor model in explaining the variation in stock returns. We find that the three-factor model can explain the common variation in stock returns well. However, it is mis-specified for the Chinese stock market. We demonstrate that the size effect and the book-to-market effect are significant and persistent over our sample period. Interestingly, the book-to-market effect for China is much stronger than the average ones in mature markets and other emerging markets documented by Fama and French (1998). Moreover, we find no evidence to support the argument that seasonal effects can explain the results of the multifactor model. Last, our mixed observations on firm-specific fundamentals suggest that the risk-based explanation proposed by Fama and French (1995) cannot shed light on the size and BM effect for China. In view of the features of the Chinese stock market, we instead argue that China’s size and book-to-market effect may be attributed to syndicate speculators’ manipulation and mispricing caused by irrational investor behavior.

Key Words:

Asset pricing, three-factor model, A-share market, size effect, book-to-market effect, risk

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