The Fama and French Three-Factor Model in Developing Markets: Evidence from the Chinese Markets (1995-2008)

30 Pages Posted: 11 Jul 2018

See all articles by Michael J. Dempsey

Michael J. Dempsey

Ton Duc Thang University (TDTU)

Man Li

The University of Western Australia - UWA Business School

Date Written: June 20, 2018

Abstract

We study the Fama and French three-factor (FF-3F) model in relation to a developing market. To this end, we consider Chinese stock markets over the period 1995–2008, which is to say, over a period when these markets are recognized as “developing” markets influenced by speculative activity. We find that the model appears to be working as a form of “principal component analysis” for the determinants of stock price formation with book-to-market (B/M) as the “variable of choice” on account of that it captures the earnings-to-price (E/P), cash-flow-to-price (C/P) and sales-to-price (S/P) variables while remaining largely uncorrelated with firm size (whereas E/P, C/P and S/P are themselves positively correlated with firm size). The variables, however, are unrelated to risk as represented by market exposure, volatility, or leverage.

Keywords: Chinese Stock Market, Fama and French Model, Up-Market, Down-Market, Volatility

JEL Classification: G11, G12, G15

Suggested Citation

Dempsey, Michael J. and Li, Man, The Fama and French Three-Factor Model in Developing Markets: Evidence from the Chinese Markets (1995-2008) (June 20, 2018). Available at SSRN: https://ssrn.com/abstract=3199633 or http://dx.doi.org/10.2139/ssrn.3199633

Michael J. Dempsey (Contact Author)

Ton Duc Thang University (TDTU) ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

Man Li

The University of Western Australia - UWA Business School ( email )

Crawley, Western Australia 6009
Australia

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