Chinese stock marketEarnings-price ratioFama-French three-factor modelSize factorValue factor
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Abstract (AI)
We construct size and value factors in China. The size factor excludes the smallest 30% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints. The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects. Our three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China. Unlike that model, which leaves a 17% annual alpha on the earnings-price factor, our model explains most reported Chinese anomalies, including profitability and volatility anomalies.
Key Findings
1
An earnings-price ratio-based value factor captures Chinese value effects more comprehensively than the book-to-market ratio.
2
The Chinese size factor excludes the smallest 30% of firms because they are significantly valued as potential reverse-merger shell companies.
3
The proposed model accounts for Chinese profitability and volatility anomalies, which are not adequately explained by the replicated Fama–French framework.
4
The proposed three-factor model strongly outperforms a direct replication of the Fama–French (1993) model in China.
5
The replicated Fama–French model leaves a 17% annual alpha on the earnings-price factor, whereas the proposed model explains most reported Chinese anomalies.
Research Object
Chinese stock market firms and their size and value factors
Research Subject
The construction and explanatory performance of size, earnings-price, and value factors for Chinese stock-market anomalies
Publication Details
Publication Date
2019-03-15
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