An empirical analysis of the applicability of the Fama-French five-factor model and the three-factor model to China’s stock market – Based on validated evidence from listed Chinese Internet companies

Abstract

Previous research on the Fama-French three-factor (FFTF) model in domestic academia has been dominated; while the literature and applications of applying the Fama-French five-factor (FFFF) to study the Chinese stock market are scarce, and the only few articles are contradictory in their respective conclusions. This study examines the applicability of the FFTF model and FFFF model in the Chinese stock market, starting from the empirical analysis of these two models respectively. The results of this paper conclude that the FFTF model has an overall concentration of fit of over 80 %, while the FFFF model has a concentration of fit of over 89 %, thus confirming that the FFFF model is more suitable for explaining and predicting the returns of Internet-listed companies in the Chinese stock market. However, the shortcomings of in the estimation of the value factor parameters in FFTF and FFFF models still exist, and there is still a need to improve on the original model.