Asset Pricing Anomalies and the State Ownership Effect in China's Domestic Stock Market

28 Pages Posted: 30 Jun 2017

See all articles by Henry Zhang

Henry Zhang

The University of Sydney, Business School, Discipline of Finance

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: May 23, 2017

Abstract

In China, a large proportion of companies are state owned, and this factor is a likely important driver of assets prices. In this paper, a State-Owned Enterprise (SOE) benchmark/factor is constructed along with the market factor and common benchmarks used in the literature to explain returns – Value, Size, and Momentum. Testing various models using two stage Fama & MacBeth (1973) regressions, we show that the SOE factor is critical in explaining cross section returns in China’s domestic stock market. The explanatory power of the multi-factor model improves after adjusting common factors such as value, size and momentum for the SOE impact. We suggest that the SOE risk factor captures specific characteristics of the asset pricing mechanism in China. While accounting for the SOE impact improves explanatory power of the asset pricing model, further market specific factors may be relevant in China.

Keywords: State Owned Enterprise, risk factor, risk premia, value, size, momentum and sector premia

JEL Classification: G12, G15, G18

Suggested Citation

Zhang, Hui Henry and Satchell, Stephen E. and Westerholm, P. Joakim, Asset Pricing Anomalies and the State Ownership Effect in China's Domestic Stock Market (May 23, 2017). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=2995236 or http://dx.doi.org/10.2139/ssrn.2995236

Hui Henry Zhang (Contact Author)

The University of Sydney, Business School, Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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