The Value and Size Effect—Are There Firm-Specific-Risks in China’s Domestic Stock Markets?

The Fama-French three-factor asset pricing formula is applied to the Chinese A-share markets: Shanghai and Shenzhen Stock Exchanges (SSE and SZSE). The benchmark explanatory returns—value and size premiums are constructed and adopted in the cross-sectional regressions. Market beta has no explanatory power. There are some evidences of the value effect only for the SSE. No significant size effect was found. The results are robust with or without the influences of the exchange rate reform and the recent financial crisis. The model works better in general for the SSE than for the SZSE, regardless of the specifications. There may well be different fundamental forces in the two markets. The pricing regularities pervasive in most equity markets do not explain the Chinese markets sufficiently well.