Is Crash Risk A Good Pricing Factor?

In recent years,Chinese stock market has suffered risk threats from around the world.The phenomenon of stock price crash not only wears down investor’s confidence,also brings economic losses to investors.In this context,exploring the role of crash risk on the pricing of stock returns can provide investors with theoretical support for investment decisions and is important for reducing irrational investment behavior in financial markets.This paper focuses on the following two questions: Can stock price crash risk,which measures the extreme risk of company,be used as a pricing factor for stock returns? Can the asset pricing model with the crash risk factor improve the explanatory power of China’s stock market returns? In order to answer the above questions,this paper selects Listed Companies in China’s A-share from Jaunary 2000 to December2018 as the research object,and constructs the market factor,size factor,value factor,profit factor,investment factor,and crash risk factor using the annual financial data of firms,monthly stock trading data,and the crash risk data of firms’ stock prices.The crash risk factor is incorporated in the Fama-French five-factor model to study the correlation between crash risk and expected return.Based on this,this paper conducts a comparative analysis of different multi-factor models with the help of GRS test and a case discussion with the data of Company C to examine the applicability of crash risk factor in China’s A-share market.After the empirical research,the following conclusions are drawn: i)size effect,profit effect and crash risk effect are relatively significant in China’s A-share market.And it is confirmed that the "small company effect" exists in the stock market.The negative profit effect in China’s stock market indicates that speculation is common in China’s stock market and investors lack long-term value investment awareness.ii)We prove the negative relationship between stock crash risk and the return rate of stock.Crash risk is regarded as a significant factor that affects the stock return of enterprises.iii)After the GRS test,it is found that the asset pricing model with crash risk factor can better explain the stock return rate of China’s A-share market,the crash risk factor can be used as a pricing factor.iv)Also,under the classification of market conditions,we find that the stock crash risk in “Bull Market” has greater negative impact on stock returns.