The Empirical Study Of Four Factor Model In China Stock Market

This paper tests the ability of Fama-French three-factor model augmented by a momentum factor to explain momentum and contrarian effect on the Chinese stock market, doing an empirical research about the relationship between the excess expected stock portfolio yield originated from momentum and contrarian effect and the market yield,the company size,the book-market value and price momentum.Using the history transaction data of all A shares in Shanghai and Shenzhen Stock Exchange from June 1998 to June 2007, we first described statistic of the four pricing factor's time series data, found that there exist certain size effect, value effect and momentum-contrarian effect in Chinese stock market among which value effect and contrarian effect are more obvious ,and momentum effect only appears when formation period is 12 months to big-size stock, The main evidence of regularities in factors' behavior are as follows: the existence of "small companies' February and March effect"; Size effect,value effect and contrarian effect mainly exist in the rising market ;Accordingly, during the bull market , size effect and contrarian effect are more obvious. And then using multiple linear regression method ,this paper compared the ability to account for the momentum and contrarian effects between the four factor model and the three factor model, found that when joining the previous one-year return factor as momentum factor in the four-factor model ,it performs better in explaining medium-term price momentum.Additionaly, we set July 2005 to be a separate point to test the stability of the model before and after the point .The result is that: after the point,the model becomes unstable ,the coefficient of the value factor become unsignificant. The improved four factor model by substituting value factor for liquid-stock share factor proves to be a better model.The conclusion of the study can be used as guide to decision-making and performance evaluation in investment portfolio management , with a theoretical value and a practicable value.