The alternative three factor model : evidence from China

• Main Authors: Chua, Victor Kim Loong, Sheng, Yuanhai, Tan, Aik Siong, Yee, Jun Xian
• Other Authors: Chang Xin
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Business::Finance::Capital market; DRNTU::Business::Finance::Equity
• Online Access: http://hdl.handle.net/10356/51539
• Institution: Nanyang Technological University

We examine the performance of the Alternative Three-Factor Model of Chen et al. (2011) in China. Conducting regression analysis using monthly returns of 25 portfolios formed by size and book-to-market-equity, we find that the model underperforms CAPM and the Fama-French Three-Factor Model in explaining stock returns based on the alpha and R-squared generated. The investment factor loadings are largely insignificant while the ROE factor loadings show a negative relationship with returns, which is contrary to the new model’s economic intuition. Using the Fama-MacBeth regression, we find that both factors are statistically insignificant in explaining the cross-sectional differences in stock returns.