Empirical Test For Fama-French Three-Factor Model In The Shenzhen Growth Enterprise Market

The Growth Enterprise Market of China has been running for about five years since built in October 23th,2009. As the essential supplementary market to the Main board, this second board plays an important role in forming the Multi-level capital market of our nation.In that case,study in the asset pricing theory of the GEM is beneficial to the healthy development of this new-emerging market.The Fama-French three-factor model,evolved from the CAPM theory has been used in selecting portfolio, evaluating the performance,measuring the excess return and estimating the capital cost,etc.Since the Three-Factor Model was put forward, the domestic scholar have been examining whether the model is suitable to our security market. The domestic scholars have made a great many empirical test towards Three-factor model. The tests were mainly made in Shanghai and Shenzhen Main board, hardly in the Growth Enterprise Market. Hence, study in the asset pricing theory for the GEM,finding whether the FF three-factor model applies this market and offering information for the investors is very necessary.This article tests the influence of market risk,book-to-market and company size to the GEM stock excess return from both sides, empirical test and standardized analysis. Before the test, this article introduce the modern asset pricing theory, including Modern Portfolio Theory,CAPM theory and APT theory. On the basis of Fama-French Three-Factor Model,this article chooses the monthly trading data from the Shenzhen GEM and make an systematic analysis on the feasibility of the model.On the basis of Fama-French Three-Factor Model,this article chooses the monthly trading data from the Shenzhen GEM and make an systematic analysis on the feasibility of the model. This article sets up explanatory variables and explained variables according to Fama and French’s method but makes adjustment according to China accounting principle. The basic empirical method is multiple linear regression towards the dated data. After the conventional test of the three-factor model, this article makes a two-factor model test as a comparison to see if HML is necessary to explain the share price in GEM. At last, two methods of stability tests are used to the regression equation.The analysis of the empirical test finds that the three-factor fit the data if we check the chi squared test of goodness of fit. Rm-Rf and SMB explains the return volatility of the targeted portfolio, but the HML factor do not pass the t-test. After the HML factor is deleted from the equator, the coefficients and the significance do not change a lot. After all, this article makes the conclusion that the Fama-French Model is not suitable for the GEM market. In the analysis on the test, the risk premium to the small size portfolio investors and the manipulation of the GEM market and the inadequacy of BM valuing the company risk attribute to the result.The creation of this article is to apply the Three-Factor Model to the GEM market,and make some adjustment to the model according to the first empirical test and make an analysis from the stock market manipulation and the BM effect.