Shanghai A-share Market Ff Three-factor Model Applicability

According to the month data in Shanghai stock exchange from 2002 to 2005, this paper does an empirical research on the adaptability of the Fama-French three factors model in Chinese stock market. Besides, this paper also investigates the characteristics of the cross-section expected stock returns and the relationship between expected returns and market portfolios,size and book-to-market equity.The conclusion is that size effect and book-to-market equity effect exist in Chinese stock market during 2002-2005.Large stocks have higher average stock returns than small stocks, high book-to-market stocks have higher average stock returns than low book-to-market stocks. Furthermore, given the same sample, Fama-French three factors model which is based on market portfolio,size and book-to-market equity acts much more better than CAPM at zero hypotheses, adjusted R-squared and statistical significance.The Fama-Macbeth test for size and book-to-market equity also confirms the statistical significance of SMB and HML as risk proxies. The three factors model is able to explain the cross-section expected stock returns, its adaptability in Chinese stock market is confirmed.