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Pricing of Equities in China: Evidence from the Shanghai Stock Exchange

Author

Listed:
  • Michael E. Drew
  • Tony Naughton
  • Madhu Veeraraghavan

Abstract

In this paper we compare the performance of the traditional CAPM with the multifactor model of Fama and French (1996) for equities listed in the Shanghai Stock Exchange. We also investigate the explanatory power of idiosyncratic volatility and respond to the claim that multifactor model findings can be explained by the turn of the year effect. Our results show that firm size, book to market equity and idiosyncratic volatility are priced risk factors in addition to the theoretically well specified market factor. As far as the turn of the year effect is concerned we reject the claim that the findings are driven by seasonal factors. Our findings have implications for both academic researchers and practitioners. This is because we demonstrate that by following the investment strategies investigated in this paper superior returns could be generated – returns in addition to those offered by the market. Of course this is only applicable to those investors who are willing to take additional risks in order to generate additional returns. In summary, our results show that a broader asset pricing model such as the one investigated in this paper does a much better job than the single index CAPM.

Suggested Citation

  • Michael E. Drew & Tony Naughton & Madhu Veeraraghavan, 2004. "Pricing of Equities in China: Evidence from the Shanghai Stock Exchange," School of Economics and Finance Discussion Papers and Working Papers Series 174, School of Economics and Finance, Queensland University of Technology.
  • Handle: RePEc:qut:dpaper:174
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    File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2004/DP%20No.%20174%20-%20Drew%20&%20Others.pdf
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    References listed on IDEAS

    as
    1. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    2. MacKinlay, A. Craig, 1995. "Multifactor models do not explain deviations from the CAPM," Journal of Financial Economics, Elsevier, vol. 38(1), pages 3-28, May.
    3. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    4. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    5. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    6. repec:sae:ausman:v:28:y:2003:i:2:p:119-139 is not listed on IDEAS
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    Cited by:

    1. Chandra Shekhar Bhatnagar & Riad Ramlogan, 2012. "The capital asset pricing model versus the three factor model: A United Kingdom Perspective," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 2(1), pages 51-65, February.

    More about this item

    Keywords

    Asset Pricing; CAPM; China; Small Firm Effect; Turn of the Year Effect.;

    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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