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Asset Pricing in China: Evidence from the Shanghai Stock Exchange

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  • Michael E. Drew
  • Tony Naughton
  • Madhu Veeraraghavan

Abstract

Capital market theory is concerned with the equilibrium relationship between risk and expected return on financial claims. Within this framework, this paper seeks to extend the mounting evidence against the view that the beta coefficient of the Capital Asset Pricing Model is the sole measure of risk. In this paper we test the multifactor approach to asset pricing in one of the most challenging international markets, the Shanghai Stock Exchange, China. Firstly, we seek to determine whether size and value premia exist in China. Secondly, we address the challenge that size and value premia are largely determined by seasonal factors (such as the January and/or Chinese New Year effect). Our findings suggest that mean-variance efficient investors in China can select some combination of small and low book-to-market equity firms in addition to the market portfolio to generate superior risk-adjusted returns. Moreover, we find no evidence to support the view that seasonal effects explain the findings of the multifactor model. In summary, we suggest the market factor alone is not sufficient to describe the cross-section of average stock returns in China.

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File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2003/DP%20No%20128.pdf
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Bibliographic Info

Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 128.

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Date of creation: 20 Jan 2003
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Handle: RePEc:qut:dpaper:128

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Keywords: Asset Pricing; Seasonal Effects; China.;

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References

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