Validity Test Of Fama-French Three Factor Improved Model

Since its establishment in 2009,Growth Enterprise Market(GEM),as an important supplement to the Main-Board Market,has provided financing channels and growth space for the "two high and five new" enterprises.Since China has entered the period of economic new normal development,technological innovation and industrial structure reform have become particularly important.And the GEM takes the arduous task of promoting economic structure adjustment.In this new historical period,it is still of far reaching significance to understand its pricing mechanism.At first,the article selects the GEM as the research object,groups all stocks in GEM according to the size and book-to-value ratio,uses Fama-French three-factor model which is widely applied in Main-Board Market to process the regression analysis.The empirical results show that there exists obvious market premium and scale effect in the GEM in our country,but the book-to-value ratio effect is not obvious.Next,based on this conclusion,this paper replaces book-to-value ratio with earnings-price ratio to measure the value factor of Fama-French three factor model to improve the Fama-French three factor model.And after grouping stocks according to the size and earnings-price ratio,it applies this improved model on GEM to process empirical test.And finally,compares the result of regression analysis with the previous result,exploring the effectiveness of the two models in the GEM.The empirical results are as follows:Firstly Fama-French three-factor model is effective in the GEM and it can better explain the excess returns of most stocks;Secondly,market premium and scale effect is visible.There is a significant scale premium in smaller companies,and smaller companies gethigher excess returns.The book-to-value ratio factor effect is not significant,it means there is no obvious book-to-value effect in the GEM;Thirdly,Fama-French three-factor improved model is effective in GEM,and the effect is better than the original model.GEM has visible market premium,scale effect and strong earnings-price ratio effect.The earnings-price ratio is negatively correlated with excess stock returns in the low earnings-price ratio group and positively correlated with excess stock returns in the high earnings-price ratio group.It indicates that the earnings-price ratio factor is more important pricing factor than the book-to-value ratio factor in the GEM.