Comparison of China Three-factor model and Fama-French Three-factor: an Empirical Analysis

Abstract

Fama-French factors model (FF-3) is a famous model derivate from CAPM to explain the stock return. However, in China, in consideration of A-shares, a more suitable model for Chinese market is in need, thus a China three-factor model (CH-3) was constructed. There was no doubt that China three-factor model dominated Fama-French three-factor model from 2000 to 2017. Nevertheless, in recent year, due to the COVID-19 and the change of world situation, China Stock Market had also changed. In this paper, we tried to use our knowledge and extended the data to 2021 to test the effectiveness of each model. According to the analysis, the effectiveness of Fama-French factors model is almost equivalent to China three-factor model in recent year based on the data validation, while China model can still dominate Fama-French model if one includes the data since 2000. Overall, these results shed light on guiding further exploration of model selection for assets evaluations.