An Empirical Analysis On The Determinants Of Stock Returns In Shanghai Stock Exchange

Early empirical studies showed that expected stock returns can be decided by beta and can be forecast by the CAPM model. However, in the last 20 years studies found that expected stock returns cannot be decided by beta alone and other characteristic variables can be added to explain expected stock returns, such as size and B/M. Using a sample of 401 stocks listed on Shanghai Stock Exchange before December, 1998, this paper adds past sales growth and CF/P to the study and applies different methods to calculate B/M. This paper analyzes the cross-sectional determinants of expected stock returns by both one-factor model and multi-factor models. And this paper finds that BETA does not have explanatory power to expected stock returns across all the models; Size and B/M can always significantly explain expected stock returns, the former is negatively related to expected stock returns and the latter is positively related to expected stock returns, but Size have not explanatory power when associated with B/M; all other factors, such as past sales growth and CF/P, don't have explanatory power; when size is controlled, the proportion of negotiable shares to total shares also have significant explanatory power. This paper discusses the reason why the determinants such as size and B/M have explanatory power after a series of empirical analysis. And the paper also uses the viewpoints of behavioral finance to explain the anomalies that expected stock returns deviate the CAPM. The paper includes 5 parts: introduction, summaries, empirical parts (2 parts) and the conclusion of the empirical analysis.