Factor models for Chinese A-shares

Abstract

We compare the performance of commonly employed asset pricing models on a large, liquid, but mostly segmented Chinese A-shares equity market. When restricting ourselves to factor models developed for the U.S. equity market, the q-factor model performs well. However, it is outperformed by a modified Fama-French six-factor model and by a four-factor asset pricing model tailored to the Chinese A-shares market. A data-driven method results in a seven-factor model but does not reduce the pricing errors to a set of test assets. The ranking of asset pricing models changes when we incorporate transaction costs. Both direct and data-driven model comparison methods now lead to a three-factor model comprising a market, size, and earnings-based value factor.

Keywords: Anomalies, Asset pricing, China, Equity markets, Emerging markets, Factor models, Investing

JEL Classification: C58, D53, G11, G12, G15