Testing the Fama–French Five-Factor Model on China’s A-Share Market

Summary

This empirical study adapts the Fama–French five-factor framework to China’s A-share equities. It constructs market, size, book-to-market, profitability, and investment factors from monthly stock data, then forms size-sorted portfolios crossed with valuation, profitability, or investment groups. Time-series regressions and joint tests of portfolio intercepts are used to compare the model with CAPM and three- and four-factor alternatives. Because investment and profitability factors show strong collinearity, the study removes their shared component from the investment factor before its final analysis.

For the 2005–2016 sample, the authors report that the adjusted five-factor model explains most portfolio excess returns, with size and valuation particularly important and size effects pronounced among smaller stocks. Profitability and adjusted investment also contribute, though less strongly. These conclusions are specific to the chosen sample, factor definitions, equal-weighted portfolios, and monthly rebalancing. The document reports historical factor-model results, not a live strategy or evidence that the factors will persist out of sample.

Key ideas

• The study constructs five monthly equity factors for China’s A-share market using size, valuation, profitability, and investment characteristics.
• It evaluates factor models with portfolios formed across size and another characteristic, then regresses portfolio returns on the factors.
• The authors adjust the investment factor to remove its shared variation with profitability.
• In the reported sample, the five-factor model explains most portfolio excess returns, with size and valuation especially prominent.
• The findings are historical and depend on the study’s portfolio construction, factor definitions, and sample period.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.