The Fama and French three-factor model in developing markets: evidence from the Chinese markets


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The authors study the Fama and French three-factor (FF-3F) model in relation to a developing market. To this end, they consider Chinese stock markets over the period 1995–2008, which is to say, over a period when these markets are recognized as “developing” markets influenced by speculative activity. The authors find that the model appears to be working as a form of “principal component analysis for the determinants of stock price formation with book-to-market (B/M) as the “variable of choice” on account of that it captures the earnings-to-price (E/P), cash-flow-to-price (C/P) and sales-to-price (S/P) variables while remaining largely uncorrelated with firm size (whereas E/P, C/P and S/P are themselves positively correlated with firm size). The variables, however, are unrelated to risk as represented by market exposure, volatility, or leverage.

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    • Table 1. Descriptive statistics for the Chinese A-share market over the period January 1995 – December 2008
    • Table 2. Basic characteristics for down-markets, up-markets and full sample over the period January 1995 – December 2008
    • Table 3. Average equal-weighted monthly returns on double-sorted portfolios formed on size and book-to-market (B/M) quintiles from 1995 through 2008
    • Table 4. Fama-French three-factor model regressions over the period 1995–2008
    • Table 5. Returns and firm characteristics for various characteristic sorts into quintile portfolios
    • Table 6. Average returns for double-sorted portfolios formed on total volatility, size, and book-to-market ratio (B/M)
    • Table 7. Average characteristics for quintile portfolios formed on total volatility from 1995 through 2008