Modified Fama-French Three-Factor Model and the Equity Premium: An Empirical Test in the Chinese Stock Market

2018 2nd annual International Conference on Cloud Technology and Communication Engineering

计算机科学;无线电电子学

Wang, Xiaoyuan^1

College of Arts and Science, New York University, New York

NY

1000, United States^1

关键词: Chinese stock market;    Empirical test;    Explanatory power;    Market capitalization;    Risk premium;    Shanghai stock exchanges;    Three industries;    Three-factor model;   

Others  :  https://iopscience.iop.org/article/10.1088/1757-899X/466/1/012014/pdf
DOI  :  10.1088/1757-899X/466/1/012014

学科分类：计算机科学（综合）

来源: IOP

【 摘 要 】

Fama-French model is proposed as an alternative to the CAPM model to explain the equity premium found in stock market. This paper applies the original and modified Fama-French three-factor model in three industries (Finance & Insurance, Real Estate, and Pharmaceutical) of China's Shanghai Stock Exchange market. The study examines the relation between risk premium and the three Fama-French factors using six portfolios sorted by market capitalization and book-to-market ratio (inverse of price-to-book ratio). The result shows that Fama-French factors have consistent explanatory power of the risk premium. Using the original Three-Factor Model and CAPM Model as reference, the modified Three-Factor Model, with cross and quadratic terms added, significantly improves the performance of the model.