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Fama–French in China: Size and Value Factors in Chinese Stock Returns

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  • Grace Xing Hu
  • Can Chen
  • Yuan Shao
  • Jiang Wang

Abstract

We investigate the size and value factors in the cross‐section of returns for the Chinese stock market. We find a significant size effect but no robust value effect. A zero‐cost small‐minus‐big (SMB) portfolio earns an average premium of 0.61% per month, which is statistically significant with a t‐value of 2.89 and economically important. In contrast, neither the market portfolio nor the zero‐cost high‐minus‐low (HML) portfolio has average premiums that are statistically different from zero. In both time‐series regressions and Fama–MacBeth cross‐sectional tests, SMB represents the strongest factor in explaining the cross‐section of Chinese stock returns. Our results contradict several existing studies which document a value effect. We show that this difference comes from the extreme values in a few months in the early years of the market with a small number of stocks and high volatility. Their impact becomes insignificant with a longer sample and proper volatility adjustment.

Suggested Citation

  • Grace Xing Hu & Can Chen & Yuan Shao & Jiang Wang, 2019. "Fama–French in China: Size and Value Factors in Chinese Stock Returns," International Review of Finance, International Review of Finance Ltd., vol. 19(1), pages 3-44, March.
    • Handle: RePEc:bla:irvfin:v:19:y:2019:i:1:p:3-44
    DOI: 10.1111/irfi.12177
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    Cited by:

    1. Hui Zeng & Ben R Marshall & Nhut H Nguyen & Nuttawat Visaltanachoti, 2022. "Are individual stock returns predictable?," Australian Journal of Management, Australian School of Business, vol. 47(1), pages 135-162, February.
    2. Kong, Dongmin & Yang, Yiwei & Wang, Qin, 2023. "Innovative efficiency and firm value: Evidence from China," Finance Research Letters, Elsevier, vol. 52(C).
    3. Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2021. "Anomalies in the China A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    4. Wang, Shaoping & Yu, Lu & Zhao, Qing, 2021. "Do factor models explain stock returns when prices behave explosively? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    5. Zeng, James Si, 2021. "Does regulation of defensive tactics with mandatory rules benefit shareholders? Evidence from event studies in China," International Review of Law and Economics, Elsevier, vol. 66(C).
    6. Ali, Fahad & Ülkü, Numan, 2020. "Weekday seasonality of stock returns: The contrary case of China," Journal of Asian Economics, Elsevier, vol. 68(C).
    7. Fan, Di & Lo, Chris K.Y. & Zhou, Yi, 2021. "Sustainability risk in supply bases: The role of complexity and coupling," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    8. Liu, Jianan & Stambaugh, Robert F. & Yuan, Yu, 2019. "Size and value in China," Journal of Financial Economics, Elsevier, vol. 134(1), pages 48-69.
    9. Kanis Saengchote, 2020. "Profitability, Investment and Asset Pricing: Reconciling the Valuation and the q-Theory Approaches in the Thai Stock Market," PIER Discussion Papers 124, Puey Ungphakorn Institute for Economic Research.
    10. Zhang, Han, 2021. "An inflation-based ICAPM in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    11. Cheng, Hang & Shi, Yongdong, 2020. "Forecasting China's stock market variance," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    12. Chang, Danting, 2021. "Fundamental anomalies and the size puzzle in China: A data mining approach," Finance Research Letters, Elsevier, vol. 42(C).
    13. Charles M C Lee & Yuanyu Qu & Tao Shen, 2023. "Gate Fees: The Pervasive Effect of IPO Restrictions on Chinese Equity Markets," Review of Finance, European Finance Association, vol. 27(3), pages 809-849.
    14. Sha, Yezhou & Gao, Ran, 2019. "Which is the best: A comparison of asset pricing factor models in Chinese mutual fund industry," Economic Modelling, Elsevier, vol. 83(C), pages 8-16.
    15. Zhang, Tianyang & Lence, Sergio H., 2022. "Liquidity and asset pricing: Evidence from the Chinese stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    16. Shan, Chenyu & Tang, Dragon Yongjun & Wang, Sarah Qian & Zhang, Chang, 2022. "The diversification benefits and policy risks of accessing China’s stock market," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 155-175.
    17. Kim, Saejoon, 2021. "Enhanced factor investing in the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    18. Li, Cong-Cong & Xu, Hai-Chuan & Zhou, Wei-Xing, 2020. "News coverage and portfolio returns: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    19. Wang, Jianqiu & Wu, Ke & Tong, Guoshi & Chen, Dongxu, 2023. "Nonlinearity in the cross-section of stock returns: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 174-205.
    20. Sun, Kaisi & Wang, Hui & Zhu, Yifeng, 2022. "How is the change in left-tail risk priced in China?," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    21. Muhammad Usman Arshad, 2021. "Forecasted E/P Ratio and ROE: Shanghai Stock Exchange (SSE), China," SAGE Open, , vol. 11(2), pages 21582440211, June.
    22. Huang, Wenli & Li, Shi & Qi, Zhen & Zhang, Qi, 2022. "Macro disagreement and international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    23. Li, Zhiyong & Rao, Xiao, 2022. "Evaluating asset pricing models: A revised factor model for China," Economic Modelling, Elsevier, vol. 116(C).

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