An Empirical Analysis Of The Improvement By Liquidity On The Factor Model In China's Stock Market

Exploring the pricing model of China's stock market is of great significance for enriching the financial asset pricing theory and improving the operation of China's stock market.Considering the domestic and foreign research and the risk feature of China's stock market,we find that the existing theoretical models(such as Fama-French three-factor and five-factor model)cannot fully explain and predict the pricing in China's stock market.The problem,especially for the significant liquidity premium effect,most research empirically explores the effect itself and lacks the analysis of the underlying pricing mechanism.We add liquidity factor into the Fama-French five-factor model,establish an empirical model and quantitatively analyze the pricing model adapt to China.The sample data are the return rate and various indicators for all A-shares of Shanghai and Shenzhen stock markets for a period of 180 months from July 2002 to June 2017.The factors are grouped by univariate and bivariate.Experientially test their impact on stock returns,and then use the Fama-Macbeth twostep regression method to perform empirical tests.Finally,we construct the factor model like Fama-French and perform time series regression to explore the factor model adapt to China.We find that the size,book value to market ratio,and liquidity have a significant predictive ability to the return on investment portfolio.The liquidity level after the equity split reform has significantly improved compared to before,while the profitability and investment level have no significant effect on China's stock market.The empirical results confirm that China's stock market adapts to the four-factor model determined by market risk,size,liquidity and value,and liquidity factor has a significant improvement effect on the pricing model.Due to special development history,institutional environment,and investor structure,there are many differences between China's stock market and foreign mature markets,which are characterized by high market risk,strong speculative power,neglected value investment,and limited short selling.In the market environment,the heterogeneity of investors result to the abnormally high liquidity,thus the liquidity premium is significant and the stocks are generally overvalued.It indicates that there are pricing deviations in China's stock market.Therefore,it is necessary to further strengthen the construction of the stock market system,improve the investor education,etc.to make the stock market develop orderly and better serve the real economy.