Empirical Research Of The Fama-French Five-Factor Model In China’s A Share Market

Even though China’s stock market found close at the end of 1990, but after about one quarter of a century of growth it has become the world’s second largest market capitalization. Admittedly, the stock market has played a huge role in the process of China’s economic development through its financing function. However, stock market speculation, information distortion and high volatility also tend to be people’s attention. From the perspective of asset pricing, the Fama-French five-factor model attempts to describe the variations of China’s A share market stocks’cross-section returns, look for factors that describe stocks’ returns.In my research I select all A shares, including Shanghai Stock Exchange board, Shenzen main board, small board and GEM, from May 2001 to December 2015,176 months. Use the listed company’s annual financial data and monthly market data, to construct market factor, size factor, value factor, profitability factor and investment factor. And construct the portfolios at the end of April each year, calculates the portfolios’ monthly excess return. Then use the factors to regress the portfolios’ monthly excess returns, getting the regression intercepts and the coefficients of different factors in the construction period. And in the paper, I compared the five-factor model with the three-factor model.By the factors’ descriptive statistics in the sample period, I find the market factors and investment factors are both small, statistically not significant, but the size factors, value factors and profitability factors are significantly positive on statistics. While using the factors to regress the excess returns, by the t-statistics, I find the regression intercept is not significant, but the coefficient b of the market factor is very significant. The size factor’s coefficient s is significant, while the value factor’s coefficient h only shows significant in the large-scale or high-profit portfolios. The profitability factor’s coefficient r is also significant, while the investment factor’s coefficient c is not significant.By empirical results, the following conclusions can be drawn from the research: The Fama-French five-factor model has a significantly improvement over the original three-factor model, although it can not fully descript the variations of China’s A share market stocks’ cross-section returns; the size effect and the profitability effect are the most significant, while the value effect and the investment effect are weaker. We recommend that investors of China’s A share stock market should focus on the sustainable profitability of listed companies-which stands for future prospects-put investment sight on the long-term return, this is also conducive to maintaining the stability of the stock market.