We construct the five factors in Fama and French (FF, 2015) and the four factors in Hou, Xue, and Zhang (HXZ, 2015) for the Chinese stock market. Our objective is to identify a parsimonious factor model that builds on these factors and provides an adequate explanation for time-series and cross-sectional variations in Chinese stock returns. Our main findings are as follows: (1) neither the FF investment factor nor the HXZ investment factor earns a significant return in the Chinese stock market; (2) except for the value factor, the other FF factors can be explained by the four HXZ factors; (3) three of the four HXZ factors, namely size, profitability, and investment, cannot be explained by the five FF factors; (4) the best performance model is comprised of the market factor, the FF value factor, a modified HXZ size factor, and a modified HXZ profitability factor; (5) the maximum Sharpe ratio is achieved by investing about 5% in the market factor, 20% in the value factor, and roughly the same percentage in the size and profitability factors. The findings are consistent in the three time periods we analyse.
|Journal||China accounting and finance review (中國會計與財務硏究)|
|Publication status||Published - 2019|