Purpose of the study
This paper aims to test Fama-French five factors model in the Chinese A-share stock markets and in the real estate industry in order to better understand the Chinese markets and to provide the Chinese investors a reliable asset pricing model.
Data and methodology
The data is mainly extracted from Datastream. The tracking period is from July 1st 2002 to December 31st 2015 in total 162 months. There were more than 3000 listed companies in the Chinese A-share market and 138 listed companies in the real estate industry in this study. The methodology is mainly to apply Fama-French five factors model in the Chinese A-share stock markets and in the real estate industry along with other tests such as Durbin-Watson test and multicollinearity to evaluate the model performance.
Findings
The Fama-French five factors model performs well in the Chinese A-share market and the Chinese real estate industry with the data from July 2002 to December 2015. Value factor is not helpful on explaining the excess return of either A-share size-B/M portfolio or real estate industry size-B/M portfolio. The reason why value factor is insignificant in explaining A-share is the speculative environment in Chinese stock market. However, speculation is not the key which makes value factor insignificant in real estate market. Investment factor has limited explanatory power in the A-share size-B/M portfolio too. Surprisingly, five factors model performs better in the Chinese real estate industry than in the Chinese A-share market because five out of six factors are significant at 5 % level and the factors are less correlated
