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A New Four-factor Model for the Chinese Stock Market

Author

Listed:
  • Heping Xiong

    (Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China)

  • Chao Tang

    (Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China)

  • Jianhui Cao

    (Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China)

  • Haitao Zhang

    (Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China)

Abstract

We generate a fundamental signal library containing over 8,000 fundamental signals in the Chinese stock market. Two tests are conducted to identify anomalies within this signal library. Out of these, 142 signals pass both tests. We apply several aggregation techniques to extract information from the signals and find that principal component analysis performs the best. Further-more, we construct a factor based on the 142 signals and augment the Fama French three-factor model to create a four-factor model, which performs better than the Fama-French three-factor model, the Carhart four-factor model, the Q4 factor model, the Fama-French five-factor model, and performs at least as well as the Fama-French six-factor model.

Suggested Citation

  • Heping Xiong & Chao Tang & Jianhui Cao & Haitao Zhang, 2025. "A New Four-factor Model for the Chinese Stock Market," Annals of Economics and Finance, Society for AEF, vol. 26(2), pages 853-890, November.
    • Handle: RePEc:cuf:journl:y:2025:v:26:i:2:xiongtangcaozhang
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    References listed on IDEAS

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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