Validity Of The Fama French Three Factor Model

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Validity of the Fama French Three-Factor Model in China during 2011-2015 Validity of the Fama French Three-Factor Model in China during 2011-2015 Chao Xiong Ohio University Abstract This paper mainly explores the validity of the Fama-French Three Factors model during 2011-2015 by using 30 stocks which is from A-share stock market in China, in contrast to the results of Fama and French (1993) in U.S, there are some differences. Market risk premium has a significant in Chinese stock market, but for the factors SMB and HML, both of them are not as significant as the United States, but it still has a little marginal return. Meanwhile, we use Capital Assets Pricing Model to compare with Fama-French Three Factors…show more content…
To maximizing the interest of the investment, it depends on the information capture capability of investors in the stock market. Most investors in China start their investments without enough knowledge about the operating of stock market. They just follow what the most people do. If things continue in this way, economic bubble may occur. Therefore, it is particularly important for investors to get a general knowledge about the core of stock market. Over the past few decades, economists were continually developing a variety of asset pricing models. The first and the most important model is called Capital Assets Pricing Model, which was developed by William Sharpe, John Lintner and Jack Treynor (1964). It is based on the theory of composition and capitalization, which discussed the expected return and the relationship between risky assets in stock market. And now, Capital Asset Pricing Models becomes the pillar of multiple asset pricing models, and widely use in investment. However, since the 1970s, foreign economists began to do a lot of empirical research, specially in American capital market, which is able to provide a mature financial environment for the Capital Asset Pricing Model. Nevertheless, in 1980, there have been lots of negative verification results, economists started to discuss the Capital Asset Pricing Model, sometimes, it can not reasonably explain in stock market. In 1992, Fama and French (1992) considered
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