Modified Fama-French Three-Factor Model and the Equity Premium: An Empirical Test in the Chinese Stock Market

[摘要] Fama-French model is proposed as an alternative to the CAPM model to explain the equity premium found in stock market. This paper applies the original and modified Fama-French three-factor model in three industries (Finance & Insurance, Real Estate, and Pharmaceutical) of China's Shanghai Stock Exchange market. The study examines the relation between risk premium and the three Fama-French factors using six portfolios sorted by market capitalization and book-to-market ratio (inverse of price-to-book ratio). The result shows that Fama-French factors have consistent explanatory power of the risk premium. Using the original Three-Factor Model and CAPM Model as reference, the modified Three-Factor Model, with cross and quadratic terms added, significantly improves the performance of the model.

[发布机构] College of Arts and Science, New York University, New York; NY; 1000, United States^1

[效力级别] 无线电电子学 [学科分类] 计算机科学（综合）

[关键词] Chinese stock market;Empirical test;Explanatory power;Market capitalization;Risk premium;Shanghai stock exchanges;Three industries;Three-factor model