Empirical Analysis Of The Applicability Of Fama-French Five-factor Model In China's A-share Market And Various Industry Sectors

The theory of asset pricing is one of the most important theoretical bases in financial economics.At present,the most cutting-edge research result of asset pricing model is the FamaFrench five-factor model proposed by Fama and French in 2015.This model takes the dividend discount model as the economic theory foundation,and introduces the profit factor and investment factor on the basis of the original three-factor model,which makes up for the deficiency of the original three-factor model in the economic theory foundation and improves the model's ability to explain the return rate of the stock market.China's securities market has gone through nearly 30 years since its establishment in the early 1990 s.Although it has surpassed Japan to become the world's second largest market in terms of scale,there are still many problems in China's securities market,such as imperfect laws and regulations,unreasonable structure of investment subjects,and insufficient market effectiveness.Therefore,this paper aims to explore the applicability of Fama-French five-factor model in China's Ashare market.This article selects in May 1995 to April 2017,A total of 22 years,264 months in Shanghai and shenzhen two city A shares(including the Shanghai and shenzhen A shares and the GEM)as A sample.The monthly market transaction data and annual financial data of listed companies were used to calculate the five factors.This article divided the sample using two methods: the first is the sample according to the book value ratio,profitability and investment scale,the scale of these four dimensions are divided into 5×5 scale-book value portfolio,5×5 scale-profit and 5×5 scale-investment portfolio,the second method is divided into the sample according to the company's main business is divided into 18 industries sector.Under the two classification methods,this paper uses Fama-French five-factor model for regression respectively to verify the applicability of the model in China's A-share market and the explanatory power of each factor on the excess return rate.Through the empirical test,the following conclusions can be drawn: under the first division method,the Fama-French five-factor model is applicable to China's A-share market.The scale factor and normalized profit factor have significant performance,which have strong explanatory ability to explain the excess return of China's A-share market.The value factor is not very significant in China's A-share market,and is negatively correlated with the earnings of companies with low book-to-market ratio,and positively correlated with the earnings of companies with high book-to-market ratio and high profitability.The investment factor is not significant on the whole,but it can explain the excess return of small scale companies with high investment growth rate.In the second division method,this paper found that the Fama-French five-factor model is not applicable to all types of market segments in China.In each stock industry,the scale factor is significant,indicating that there is a significant scale effect in each industry in China.The performance of value factor is not significant,but it is positively correlated with excess return in several industries.The profitability factor is positively significant in most industries,proving the positive correlation between profitability and stock returns.Investment factors are also positively significant in most industries,indicating that companies with lower investment levels will have higher excess returns.