An Empirical Study of the Fama–French 5-factor Model in Chinese A-Share Market

Abstract

One of the most significant models in asset pricing theory is the Fama-French five-factor model, which has long been the focus of both theoretical and practical study. An empirical examination of the Chinese A-share market from 2000 to 2022 is used in this paper to determine the efficacy of the Fama-French 5-factor model in the Chinese A-share market. The study shows that the 5-factor model works fairly well in describing stock returns in A-share market, particularly when profit and investment variables are taken into account. However, in this paper's investigation of the excess returns of small-cap and high price-to-book companies, the 5-factor model still has certain limitations, since the selected data is the whole Chinese A-share market, which does not go deep into specific fields, which may lead to inaccurate and unrepresentative results. These findings have significant theoretical and practical implications for enhancing asset pricing models and understanding the characteristics of China's A-share market. The study divides stocks into five size groups (quintiles) based on market capitalization and valuation. It suggests that investors should pay attention to the intersection of market capitalization and valuation when selecting stocks. Small-cap stocks may offer higher returns, while large-cap stocks may have reduced risk. By considering both factors, investors can potentially optimize their investment portfolios.