The Application of Asset Pricing Models in the Capital Market

Abstract

With the development of China's financial and capital markets, more and more investors will choose to use different asset pricing models to analyze the effectiveness of their investments. Under the background of efficient markets hypothesis (EMH), this paper will use Fama-French three-factor model, GARCH family model and Heston model to analyze the validity and feasibility of these three commonly used models in Chinese market. Through empirical analysis, descriptive statistics and other research methods, it is found that all three models are effective but have certain limitations. It is found that the Fama-French three-factor model is too dependent on the market. The establishment of the GRACH family model is too complicated due to too many influencing factors in the market; and the time lag of the Heston model. All three models require investors to include more model analysis to get the optimal investment strategy. Therefore, this paper draws the definition of behavioral finance at the end of the paper, according to which investors' decisions can be further analyzed.