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Asia Pacific Management Review

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Is the Fama and French five-factor model robust in the Chinese stock market?
Tzu-Lun Huang*
Accounting School, Nanfang College of Sun Yat-sen University, China

a r t i c l e i n f o a b s t r a c t

Article history: This study confirms that the Fama and French (2015) five-factor model is superior to other traditional
Received 7 January 2018 asset pricing models in explaining individual stock returns in China over the 1994e2016 period. How-
Received in revised form ever, several Chinese market features considerably influence the explanatory power of these known risk
24 July 2018
factors for stock returns. With possible differences in market microstructure, the exchange in which the
Accepted 11 October 2018
stocks are listed alters the model performance. Moreover, the Share-Structure Reform is found to cause a
Available online xxx
structural change in the model performance. A further analysis reveals that the explanatory power of the
five-factor model varies with time. Overall, this study identifies some pitfalls that arise in the application
JEL Classification:
G11
of the five-factor model to Chinese stocks.
G12 © 2018 College of Management, National Cheng Kung University. Production and hosting by Elsevier
G15 Taiwan LLC. All rights reserved.

Keywords:
The Fama and French (2015) five-factor
model
Asset pricing
Capital market
The Chinese stock market

1. Introduction subsequent researches find additional patterns in average returns

The five-factor model of Fama and French (2015) attracts a great
deal of attention in the literature on asset pricing. Interest in the
application of the five-factor model has been on the rise among
both researchers and practitioners. Past studies show that the five-
factor model also works in the Chinese stock market. Extending
prior studies, this paper considers some special features of Chinese
markets and examines whether the performance of the five-factor
model varies.
Numerous asset pricing models have been proposed to explain
the return behavior for global stock markets. Among them, the
Sharpe (1964)-Lintner (1965) capital asset pricing model (CAPM),
the Fama and French (1993) three-factor model, and the Carhart
(1997) four-factor model has been considered adequate to explain
the cross-sectional variation in stock returns and market anoma-
lies. Using global factors, Fama (1998) confirms the international
adaptation of their three-factor model. Following these studies,
* Nanfang College of Sun Yat-sen University, No. 882, Wenquan Ave, Conghua,
Guangzhou, Guangdong, China.
E-mail address: spirit840000@hotmail.com.
Peer review under responsibility of College of Management, National Cheng
Kung University.
which are related to profitability and investment. Therefore, a five-
factor asset pricing model that considers the market, size, value-
growth, profitability, and investment factors is proposed by Fama
and French (2015), which provides stronger explanatory power
for asset returns. To test the model robustness, Fama and French
(2017) study international markets and find that their five-factor
model can explain return anomalies in most global regions. How-
ever, the model performance differs from region to region. Racicot
and Rentz (2017) also show that the significance of Fama and
French factors is highly variable.
The Chinese stock market poses an interesting study, as it has
obvious differences from the conventional markets in North
America and Europe, particularly in terms of market structures,
government regulations, information asymmetry, and investor
composition. The work of Guo, Zhang, Zhang, and Zhang (2017) is
probably a pioneering study that tests the five-factor model in the
Chinese stock market. Following Fama and French (2015), they
group stocks into portfolios and examine portfolio returns. They
find out strong size, value, and profitability patterns in average
returns. However, the investment factor only makes marginal
contributions. Moreover, past studies find that portfolio grouping
probably significantly affects empirical results (Lewellen, Nagel, &
Shanken, 2010; Lo & MacKinlay, 1990). Little is known about

https://doi.org/10.1016/j.apmrv.2018.10.002
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Please cite this article as: Huang, T.-L., Is the Fama and French five-factor model robust in the Chinese stock market?, Asia Pacific Management
Review, https://doi.org/10.1016/j.apmrv.2018.10.002
2 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx
whether the Fama and French (2015) five-factor model can explain
returns on individual stocks in the Chinese stock market. A sound
asset pricing model should hold theoretically for all assets, no
matter in the form of portfolios or in the form of individual stocks
(Ang, Liu, & Schwarz, 2008).
On the other hand, past studies fail to consider some Chinese
market features that might influence the model performance. For
example, Chinese shares can be traded on either the Shanghai Stock
Exchange or the Shenzhen Stock Exchange. The stock exchange
where the transactions are made probably affects the explanatory
power of asset pricing models because of different market mech-
anisms. Moreover, the Chinese stock market has experienced rapid
changes since its foundation. Some events like share-structure re-
form are supposed to cause structural breaks in the Chinese stock
market. Whether the common asset pricing factors provide
consistent predictions for stock returns or vary with time remains
unclear. Accordingly, this study seeks to address these research
gaps by using the entire universe of stocks. Specifically, the objec-
tive of this study is to explore: (i) the explanatory power of the
Fama and French (2015) five-factor model for stock returns in
China, and (ii) whether the pricing factors are robust or sensitive to
market mechanisms and share-structure reform.
This study complements the existing literature by employing
stock returns instead of portfolio returns as the dependent variable.
Specifically, this study uses the firm-level data over the 1994e2016
period and compares performance of traditional asset pricing
models, such as the Sharpe (1964)- Lintner (1965) capital asset
pricing model (CAPM), the Fama and French (1993) three-factor
model, the Carhart (1997) four-factor model, and the Fama and
French (2015) five-factor model. The results show that stock
returns in China are strongly linked to the market, size, value,
momentum, profitability and investment factors. Accordingly,
these traditional asset pricing models seem to explain well the
stock returns in China. However, other factors might exist as the
intercepts are significantly positive for all of these models.
Moreover, the explanatory power of asset pricing factors falls
when the explained variable is stock returns. Specifically, the Fama
and French (2015) five-factor model can explain more than 35% of
the variation in stock returns when applying the regression on the
full sample. The study also runs regressions for each firm and finds
that the Fama and French (2015) five-factor model can explain
47.7% on average of the variation in the excess returns on individual
stocks1. Overall, the five-factor model is superior to other models
when explaining individual stock returns. However, the explana-
tory power of the five-factor model is slightly higher than con-
ventional models. The addition of the investment and profitability
factors just slightly improves model performance, implying that
both factors offer incremental but small explanatory power for
stock returns. The conclusion is supported by the summary statis-
tics which show that average returns on the profitability and in-
vestment factors are small for Chinese stocks.
This study considers some market features in China and exam-
ines whether the model performance differs under these features.
The results show that both size and value effects are stronger on the
Shenzhen Stock Exchange than on the Shanghai Stock Exchange.
The investment factor also exhibits different impacts on these stock
exchange. The difference might be caused by potential influences of
market microstructure. Moreover, implementation of share-
structure reform in 2005 is found to cause a structural change in
the model performance, which strengthens the impacts on these
asset pricing factors. The sub-period analysis also reveals that the
1
That is, one regression is run for a single firm. A single model is estimated for
2368 times for 2368 firms. For more details, see 4.2.2.
Please cite this article as: Huang, T.-L., Is the Fama and French five-factor model robust in the Chinese stock market?, Asia Pacific Management
Review, https://doi.org/10.1016/j.apmrv.2018.10.002
explanatory power of the five-factor model varies with time. These
are possible pitfalls that arise in the application of the five-factor
model to Chinese stock returns. The results indicate that the
model performance differs with sample selection.
The rest of the paper is organized as follows. Section 2 provides
literature review. Section 3 describes data and sample construction.
Section 4 presents empirical results and robustness analyses. Sec-
tion 5 concludes.
2. Literature review
The literature has proposed numerous asset pricing models to
explain stock returns. The Sharpe (1964)-Lintner (1965) capital
asset pricing model (CAPM) claims that investors are only
compensated for undiversifiable risk. Therefore, the model pri-
marily uses beta to measure the systematic risk, which is obtained
from regressions of stock returns on market returns. The CAPM
attributes risk to a single systematic factor, but obtains little
empirical supports2. For example, the CAPM cannot explain
anomalies such as the size effect and the value effect3. Arguing that
risk could be a multidimensional factor, subsequent studies present
various multifactor models (Carhart, 1997; Fama & French 1993,
2015). For example, the Fama and French (1993) three-factor model
expands the CAPM and introduces two additional factors, the size
factor and the value factor. The arbitrage pricing theory of Ross
(1976) provides a theoretical foundation for the multifactor
models. Served as benchmarks, these models can be used to
compare portfolio returns with similar equity characteristics (i.e.,
size, book-to-market, probability, investment, and cumulative
returns). A portfolio outperforms the market when its returns beat
the benchmark.
On the other hand, a large body of literature emphasizes the
importance of the profitability and investment factors in deter-
mining average returns. The dividend discount model reveals that
the book-to-market ratio can be decomposed into investment and
profitability components4. Inspired by the conceptual link, Fama
and French (2015) introduce a five-factor asset pricing model that
considers the market, size, value-growth, profitability, and invest-
ment factors. They claim that the five-factor model is superior to
their original three-factor model. To test the robustness of the five-
factor model, Fama and French (2017) study international markets,
including North America, Europe, Japan, and Asia Pacific. They find
that the five-factor model largely absorbs the anomaly patterns in
average returns in these the regions. However, Racicot and Rentz
(2016) apply a robust instrumental variables approach proposed
by Racicot (2015) to test the robustness of the Fama and French
(2015) five-factor model. They find weak empirical evidence sup-
porting the new factors. In an extensive study, Racicot and Rentz
(2017) reach a consistent conclusion in panel data.
Due to the easy availability of Fama and French factors, much of
the literature on the U.S. stock market tends to use portfolio returns
to test asset pricing models. This method improves estimates of
beta and thereby mitigates the errors-in-variables problem. How-
ever, portfolio grouping probably dramatically influences empirical
results (Lewellen et al. 2010; Lo & MacKinlay, 1990). Comparing the
2
The CAPM implies that intercept should be zero, but empirical findings tend to
against this hypothesis.
3
The size effect refers to the phenomenon that smaller firms tend to produce
higher returns than larger firms. The value effect refers to the pattern in which
value stocks, such as those with high book-to-market ratios, tend to outperform
growth stocks, such as those with low ones.
4
The profitability component is defined as annual revenues minus the cost of
goods sold, interest expense, selling, and general and administrative expenses
during the previous fiscal year divided by the end book value of equity.
 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx
performance between using stocks and portfolios, Kan, Li, Mackay,
Sivakumar, and Zhou (1998) find that the explanatory power of
asset pricing models would increase or decrease with the number
of portfolios. Some studies also suggest that the Fama-French
model may be portfolio specific. Grauer and Janmaat (2004)
examine the unexpected consequences of grouping and find that
the Fama and French 25 portfolios may lead to a wrong answer.
Lewellen et al. (2010) show that the Fama French portfolios prob-
ably bias the researcher in favor of factor models due to a strong
factor structure. Racicot and Rentz (2017) suggest that the Fama and
French factors, due to being represented by portfolios, might raise
the possibility of specification errors. From an econometric
perspective, Ang et al. (2008) study the relative efficiency of using
individual stocks or portfolios in tests of cross-sectional factor
models. They argue that creating portfolios would destroy infor-
mation, which results in larger standard errors of cross-sectional
risk premia estimates. Ang et al. (2008) argue that “using portfo-
lios versus individual stocks matters in actual data” (p. 6).
Although Fama and French (2017) have examined the perfor-
mance of the five-factor model in the global aspect, the model
performance differs from region to region. This fact suggests that
the importance of a particular factor varies with different regions
due to diverse regional features5. Consequently, both practitioners
and academics tend to use a domestic model to gain a clear
explanation of return anomalies. In contrast to the U.S. markets, no
Fama-French factors data on the Chinese market are available.
Related studies have been hindered by the lack of high quality data.
Limited by data and sample selection, researches on the Chinese
stock market are prone to yield inconsistent results. The link be-
tween the returns on Chinese stocks and the new Fama-French
factors, probability and investment, remains speculative. Among
papers that focus on the Chinese stock market, Guo et al. (2017) is
probably the first that offers out-of-sample tests of the Fama and
French (2015) five-factor model. They follow Fama and French
(2015) and use portfolio returns as explained variables. Guo et al.
(2017) find strong patterns related to size, value and profitability
in average returns, but a weak investment pattern.
This paper is closely related to but distinct from Guo et al.
(2017). Following Fama and French (2015), they test decile portfo-
lios single sorted by anomaly variables and portfolios double sorted
by factor variables. In their study, the Fama and French (2015) five-
factor model is employed to explain portfolio returns. It is noted
that an ideal asset pricing model should hold theoretically for both
portfolios and individual stocks (Ang et al. 2008). Accordingly, the
study repeats the experiments but uses regressions on individual
stock returns instead. Moreover, Guo et al. (2017) fail to consider
some Chinese market features that might influence the model
performance, such as share-structure reform and multiple stock
exchanges. Whether the Fama and French (2015) five-factor model
provides consistent predictions or varies remains unclear. Accord-
ingly, this study seeks to address these research gaps.
3. Data and sample construction
The Chinese stock market has been experiencing dramatic
changes since foundation. Because of some extreme values pre-
sented in the early years, which might distort model performance,
5
For example, the five-factor performs well for North America, Europe and
Global markets, but are weak for stocks listed in Japan and Asia Pacific.
6
Multiple class shares are issued in the China stock market. A-share stocks use
RMB denomination and are available for domestic investors, while B-share stocks
use dollar denomination and are available for foreign investors. A-share market is
more liquid than B-share market.
Please cite this article as: Huang, T.-L., Is the Fama and French five-factor model robust in the Chinese stock market?, Asia Pacific Management
Review, https://doi.org/10.1016/j.apmrv.2018.10.002
3
the study considers a sample that contains all available A-share
stocks over the 1994e2016 period6, including all Shanghai and
Shenzhen Main Broad, Shenzhen Small and Medium-sized Enter-
prise Board (SMEB) and Growth Enterprise Market (GEM) stocks.
Monthly return series are used to measure stock returns as well as
factor portfolio returns, while data on financial statement are based
on annual frequency. All relevant data, (including closing price,
total market value, expenses, revenue, etc.) is either directly ob-
tained from the China Stock Market and Accounting Research
database (CSMAR)7 or indirectly computed. To ensure validity and
reliability, the study adopts some cutoff rules to form the sample:
(1) Firms in the financial industry are removed; (2) Firms that once
come under the Special Treatment (ST) or Particular Transfer (PT)
within 1994e2016 are judged as financially abnormal and dropped.
(3) Firms with insufficient observations (i.e., less than three years)
are excluded. (4) Data with extreme, missing, or unreasonable
values are deleted. The final sample consists of 358,573 observa-
tions, which is an unbalanced panel data of monthly frequency.
To construct comparable asset pricing factors, including the
market risk, size, value, momentum, profitability and investment
factors, this paper refers to the methodology described on the Ken
French's website and carefully follows related studies (Carhart,
1997; Fama & French 1993, 2015; Sharpe, 1964). At first, all stocks
are sorted by market capitalization at the end of June of year t. The
median size serves as a breakpoint to group the stocks into small (S)
and big (B) firms. As for the value factor, the stocks are sorted by the
B/M ratio at the end of December of year t-1. Then, the 30th and
70th percentiles of the B/M ratio are used as breakpoints to divide
these stocks into low (L), medium (M), and high (H) groups. The
intersection of the size and value groups forms 2X3 non-
overlapping portfolios, which are hold from July of year t to June
of year tþ1. Then, the value-weighted monthly returns on each
portfolio are calculated at the end of each month. The size factor is
the average return on the small stock portfolios minus that on the
big stock portfolios, while the value factor is the average return on
the two high B/M portfolios minus that on the two low B/M port-
folios. Other factors are constructed in a way similar to the value
factor. The sorting for the momentum portfolios is based on cu-
mulative return for preceding 2e12 months. These portfolios are in
nature the intersections of 2 portfolios formed on size and other
factors. Table 1 provides definitions for these factors and a detailed
account of their constructions.
4. Empirical results
4.1. Factor returns
Table 2 reports summary statistics for the risk factors con-
structed in the study, with panel A presenting the mean, standard
deviation, the 25 percentile, median, and 75 percentile for each
factor, and panel B showing the correlations among these factors.
As is revealed, the mean of market portfolio excess return, MKT, is
0.95% per month. Therefore, the value-weighted market portfolio
return is slightly higher than the risk-free rate. The annualized
excess returns equal to 11.40%, indicating that the Chinese stock
market experiences an upward trend over the sampler period.
However, the trend is volatile as the standard deviation achieves a
high value of 11.90% per month.
The size effect refers to the phenomenon that smaller firms tend
to produce higher returns than larger firms. Slightly less than the
market factor, the average return on the size factor, SMB, is 0.90%
7
CSMAR follows the standards of CRSP and Compustat databases.
4 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx

Table 1
Variable Definitions. This table provides definitions for all variables used in this study. The Fama and French factors, MKT, SMB, and HML were then computed by applying a
method similar to that of Fama and French (1993). That is, these factor returns are constructed from an independent 6 (2  3) sorts on Size and other potential anomaly
variables.

Variable Definition Construction

MKT Market Risk; “MKT” is an abbreviation for “market”. The market factor is equal to the value-weighted returns of all A-shares (including both on Shanghai and on
Shenzhen) minus the risk-free rate.
SMB The size factor; “SMB” is an acronym for “small- The median market value is used to divide all firms into small and big groups.
minus-big”.
HML The value factor; “HML” is an acronym for “high- The 30th and 70th percentiles of Book-to-Market ration are used to divide all firms into three groups.
minus-low”.
MOM The momentum factor; “MOM” is an abbreviation Cumulative return for preceding 2e12 months.
for “momentum”.
RMW The profitability factor; “RMW” is an acronym for The measure of operating profitability is defined as in Fama and French (2015), which is annual revenues
“robust-minus-weak”. minus the cost of goods sold, interest expense, selling, and general and administrative expenses during the
previous fiscal year divided by the end book value of equity. Similar to the HML factor portfolios, the 30th
and 70th percentiles server as data breakpoints.
CMA The investment factor; “CMA” is an acronym for Calculated as the change in the book value of total assets from the beginning to the end of the previous
“conservative-minus-aggressive”. period divided by the previous end book value of total assets. Similar to the HML factor portfolios, the 30th
and 70th percentiles server as data breakpoints.

Table 2
Summary Statistics For Asset Pricing Factors. Panel A of this table reports the summary statistics for factor returns: 07/1994e12/2016, 270 months. MKT are excess returns
from the value-weight market portfolio return of Shanghai and Shenzhen Main Broad. SMBt, HMLt, MOMt, RMWt and CMAt are respectively the size, value, momentum,
profitability and investment factors. MOM is momentum (Jegadeesh & Titman, 1993), cumulative return for preceding 2e12 months. These factor returns are constructed from
an independent 6 (2  3) sorts on Size and other potential anomaly variables. The factor SMB is the average return of three small stock portfolios minus the average return of
three big stock portfolios. The value factor HMLt is the average return of two high B/M portfolios minus the average return of two low B/M portfolios, HML ¼ (SH þ BH)/
2  (SL þ BL)/2. In Panel B, Pearson correlations among the five factors are shown in the lower-left triangular part of the matrix, and Spearman rank correlations are shown in
the upper-right triangular part. 199407e201612 Panel B shows the correlations for factors.

Panel A. Summary statistics

variable mean sd p25 p50 p75 min max t-statistics

MKT 0.95% 11.90% 4.85% 0.41% 5.03% 29.70% 134.30% 1.31

SMB 0.90% 5.10% 1.68% 0.96% 3.17% 22.40% 38.40% 2.90
HML 0.23% 4.69% 1.63% 0.03% 1.79% 50.50% 15.50% 0.81
MOM 5.11% 12.60% 6.05% 2.77% 0.80% 101.30% 15.90% 6.66
RMW 0.29% 6.49% 2.02% 0.25% 2.08% 71.00% 21.50% 0.73
CMA 0.17% 4.48% 1.31% 0.07% 1.28% 18.30% 49.90% 0.62

Panel B. Correlation matrix among the Fama and French five factors

MKT SMB HML MOM RMW CMA

MKT 1
SMB 0.3159 1
HML 0.5172 0.5259 1
MOM 0.0062 0.018 0.0352 1
RMW 0.594 0.6062 0.5235 0.0208 1
CMA 0.4884 0.5311 0.3539 0.0359 0.8436 1

per month, equivalent to 10.80% per annum. Accordingly, average
returns on Chinese stocks typically decrease with market capitali-
zation. Returns on small firms tend to perform better than big ones.
The corresponding t-statistic is 2.9 standard errors from zero,
which is the highest among these factors. These statistics suggest
that the size effect is strong in the Chinese market and a strategy
based on the size factor might be profitable.
The value effect refers to the pattern in which value stocks, such
as those with high book-to-market ratios, tend to outperform
growth stocks, such as those with low ones. Against the prediction,
the value factor, HML, achieves a mean of 0.23% per month with a
standard deviation of 4.69%. The low t-statistic indicates that the
spread between value stocks and growth stocks are indistinguish-
able. Therefore, the value effect is weak in the Chinese market and
the profit from the value portfolio is apparently trivial for investors.
The result is consistent with Fenghua and Xu (2004) and Hilliard
and Zhang (2015), who also find little evidence of value effect.
Similar to the value factor, neither the robust-minus-weak profit-
ability portfolio nor the conservative-minus-aggressive investment
portfolio has average premiums statistically different from zero, as
the mean of RMW and CMA are both insignificant (t ¼ 0.73 and
0.62, respectively).
Depicted in Jegadeesh and Titman (1993), price momentum is
delimited as the continuous stock performance of past winners and
losers, which implies that stock prices will continue in either an
upward or downward direction. A momentum-based strategy is
mainly about buying past winners and selling past losers. Behav-
iorists suggest that momentum profits are the consequence of
market inefficiency and investors’ herding behavior (Barberis,
Shleifer, & Vishny, 1998; Daniel, Hirshleifer, & Subrahmanyam,
1998; Hong & Stein, 1999). As shown in Table 2, the momentum
factor, MOM, exhibiting an average return of 5.11%, produces a
larger spread in average return than the size effect dose. However,
the negative value indicates that stock returns in the Chinese
market exhibit intermediate-term reversals rather than the mo-
mentum effect. Therefore, a contrarian strategy, buying recent
losers and short-selling recent winners seems to be profitable.
Consistent with Kang, Liu, and Ni (2002), the result indicates that
significant abnormal profits are associated with short-horizon
contrarian strategies, implying that Chinese investors tend to

Please cite this article as: Huang, T.-L., Is the Fama and French five-factor model robust in the Chinese stock market?, Asia Pacific Management
Review, https://doi.org/10.1016/j.apmrv.2018.10.002
 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx 5

overreact to firm-specific information, leading to a subsequent Table 3

correction. The result is not surprising because the Chinese stock Comparison of Model Performance Using a Whole Market Portfolio. This table
compares and tests the effectiveness of several asset-pricing models: (1) the Sharpe
market is dominated by individual investors. With rudimentary (1964)-Lintner (1965) capital asset pricing model (CAPM), and (2) the Fama and
knowledge about investment, most of these individual investors French (1993) three-factor model, (3) the Carhart (1997) four-factor model, (4) the
tend to be driven by market rumors and excessive speculation, Fama and French (1993) five-factor model, and (5) the augmented Fama and French
leading to overreaction. Price reversals are also found in other Asian (1993) five-factor model with the moment factor. MKTt, SMBt, HMLt, MOMt are
common asset pricing factors. The sample includes all stocks listed on Shanghai and
stock markets, as in Japan (Chang, McLeavey, & Rhee, 1995) and in
Shenzhen exchanges. Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1
Malaysia (Hameed & Ting, 2000).
Overall, the results suggest that stocks in the Chinese market VARIABLES (1) (2) (3) (4) (5)
suffer from systematic risks. Moreover, using a portfolio sorting CAPM FF3 Carhart4 FF5 ALL
analysis, this section finds strong size effects and reversal patterns MKT 1.0193*** 0.9705*** 0.9691*** 0.9504*** 0.9500***
in average returns. However, the value, profitability, and invest- (0.0028) (0.0027) (0.0027) (0.0030) (0.0030)
ment portfolios are found relatively weak in the Chinese market. SMB 0.9434*** 0.9411*** 0.8849*** 0.8853***
The result is consistent with Fenghua and Xu (2004), who find (0.0060) (0.0061) (0.0077) (0.0077)
HML 0.0824*** 0.0891*** 0.0686*** 0.0735***
strong size effect but weak value effect using a sample over the 07/
(0.0078) (0.0079) (0.0080) (0.0081)
1996e06/2002 period. Accordingly, the pricing factors which are RMW 0.1953*** 0.1903***
efficient in the U.S. market do not necessarily affect the average (0.0109) (0.0109)
returns of the Chinese market. CMA 0.1844*** 0.1814***
(0.0130) (0.0130)
Panel B of Table 2 reports the correlation matrix of the asset
MOM 0.0174*** 0.0125***
pricing factors. Overall, different Fama French factors (i.e., MKT, (0.0028) (0.0028)
SMB, HML, and CMA) are found to be correlated with one another to Constant 0.0121*** 0.0029*** 0.0024*** 0.0037*** 0.0033***
a moderate degree, but show little relation to the momentum (0.0002) (0.0002) (0.0003) (0.0002) (0.0003)
factor. The size factor, SMB, is negatively correlated with HML and
RMW, but positively correlated with MKT and CMA. It is reasonable Observations 350,325 350,325 350,325 350,325 350,325
R-squared 0.2808 0.3533 0.3533 0.3539 0.3539
that small stocks tend to be growth stocks with low B/M ratios,
weak profitability, and lower investment. The positive correlation
between HML and RMW and the negative correlation between HML
and CMA imply that high B/M firms tend to profitable and aggres-
size and book-to-market equity that are not captured by the CAPM.
sively invest. Moreover, as profitable firms tend to invest more, it
The coefficient of determination (R2) indicates the proportion of the
explains why RMW is strongly and negatively correlated with CMA
variance in the dependent variable that can be explained by the
with correlation of 0.8436. Estimates of the correlation matrix are
independent variable(s). Comparing results for specifications (1)
not completely consistent with Guo et al. (2017), so one should be
and (2), we can see the adjusted coefficient of determination (adj-
careful in interpreting the relationships. The correlations among
R2) noticeably improves after adding SMBt and HMLt into the CAPM.
these factors are found to vary when different sample period is
Accordingly, the addition of these two factors enables a more
selected. This implies that the correlation matrix would be sensitive
robust explanation of the variability in stock returns. The result
to sample selection.
suggests that typical Fama French factors are important for
describing average Chinese stock returns over the 1994e2016
4.2. Comparison of model performance
sample period.
The Fama and French (1993) three-factor model is often
4.2.1. All stocks in the market portfolio
augmented with a momentum factor, producing the Carhart (1997)
A theoretical market portfolio consists of all assets available to
four-factor model, as shown in specification (3). The explanatory
investors. For comparison purpose, the section considers a sample
variable of interest is the momentum factor ðMOMt Þ, which is based
that includes all Shanghai and Shenzhen main board stocks,
on the cumulative returns for preceding 2e12 months. Since the
Shenzhen Small and Medium-sized Enterprise Board (SMEB) and
coefficient on MOMt is negative statistically significant at the 1%
Growth Enterprise Market (GEM) stocks. A typical regression
level, past stock performance is found to influence current stock
analysis is taken to test the effectiveness of several asset-pricing
returns. Specifically, stocks that perform better in the past months
models: (1) the Sharpe (1964)-Lintner (1965) capital asset pricing
tend to have poor performance in the future. Accordingly, Chinese
model (CAPM), and (2) the Fama and French (1993) three-factor
stocks exhibit a reversal pattern, implying stocks in the winner
model, (3) the Carhart (1997) four-factor model, (4) the Fama and
(loser) group is likely to experience overreaction and approach
French (2015) five-factor model, and (5) the augmented Fama and
reversal in the near future. For investors, the profits gained by
French (2015) five-factor model with the moment factor. All of
chasing the past winners and short selling the past losers would
these models link the excess return on individual stocks to either a
inevitably be reduced. The result is quite robust because MOMt does
single factor or group of factors.
not lose its significance after including RMWt and CMAt in the
The section attempts to explore what are the crucial factors that
model, as shown in specification (6).
determine Chinese stock returns and which model is the most
Specification (4) tests the applicability of the Fama and French
effective asset-pricing model. The results are reported in Table 3. In
(2015) five-factor model in the Chinese stock market. Adding
each specification, the dependent variable Rit is always return
profitability (RMWt ) and investment (CMAt ) factors to the three-
premium, calculated as the stock return minus the risk-free rate.
factor model, the five-factor model is directed at capturing pat-
Specifications (1) and (2) are the capital asset pricing model
terns in average returns related to size, B/M, profitability, and in-
(CAPM) and the Fama and French (1993) three-factor model,
vestment (Fama & French, 2015). The adjusted coefficient of
respectively. We can see that the CAPM successfully captures the
determination (adj-R2) for the Fama and French (1993) three-factor
influences of the market risk, MKTt . Expanding on the CAPM, the
model slightly improves after adding RMWt and CMAt . The Fama
Fama and French (1993) three-factor model introduces two addi-
and French (2015) five-factor model also performs better than the
tional factors, the Size factor (SMBt ) and the value factor (HMLt ).
Carhart (1997) four-factor model in terms of adj-R2. Accordingly,
These factors are used to capture returns due to anomalies such as

Please cite this article as: Huang, T.-L., Is the Fama and French five-factor model robust in the Chinese stock market?, Asia Pacific Management
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6 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx

Table 4
Comparison of Model Performance Using Individual Stocks. The table runs regressions for each individual stock, collects related coefficients, and then computes mean
statistics for these estimates. ai is intercept term from each regression for firm i, whose average absolute value is denoted by Ajaij. s.e., t-value, and p-value are statistics
associated with the intercept term. Adj-R2 indicates the proportion of the variance in the excess return that is predictable from the model. Average ai, Ajaij, and Adj-R2, and the
number of significant alphas are used to compare the model performance. The sample consists of 2368 firms over the 07/1994e12/2016 period.

(1) CAPM (2) 3-factor

Number of Companies 2368 Number of Companies 2368

Number of Significant Alphas, ai 116 Number of Significant Alphas, ai 65

variable mean sd median min max variable mean sd median min max

ai 0.014 0.011 0.012 0.017 0.140 ai 0.004 0.011 0.002 0.038 0.129
Ajaij 0.015 0.011 0.012 0.000 0.140 Ajaij 0.008 0.009 0.005 0.000 0.129
s.e. 0.013 0.008 0.011 0.004 0.230 s.e. 0.012 0.009 0.010 0.004 0.267
t-value 1.143 0.530 1.148 1.916 3.427 t-value 0.239 0.840 0.206 2.525 4.376
p-value 0.303 0.214 0.253 0.001 0.994 p-value 0.557 0.273 0.575 0.000 1.000
Adj-R2 0.317 0.134 0.310 0.013 0.749 Adj-R2 0.465 0.127 0.472 0.013 0.833

(3) 4-factor (4) 5-factor

Number of Companies 2368 Number of Companies 2368

Number of Significant Alphas, ai 122 Number of Significant Alphas, ai 64

variable mean sd median min max variable mean sd median min max

ai 0.005 0.014 0.002 0.107 0.118 ai 0.005 0.012 0.003 0.071 0.119
Ajaij 0.010 0.011 0.007 0.000 0.118 Ajaij 0.009 0.009 0.006 0.000 0.119
s.e. 0.013 0.009 0.011 0.004 0.276 s.e. 0.012 0.009 0.010 0.004 0.276
t-value 0.274 0.966 0.232 3.197 4.707 t-value 0.344 0.811 0.353 2.614 3.474
p-value 0.512 0.290 0.517 0.000 1.000 p-value 0.547 0.274 0.563 0.001 1.000
Adj-R2 0.471 0.125 0.477 0.027 0.833 Adj-R2 0.477 0.127 0.483 0.020 0.863

(5) 6-factor

Number of Companies 2368

Number of Significant Alphas, ai 103

variable mean sd median min max

ai 0.006 0.014 0.004 0.070 0.106

Ajaij 0.010 0.011 0.007 0.000 0.106
s.e. 0.013 0.009 0.011 0.004 0.289
t-value 0.412 0.875 0.389 2.651 3.547
p-value 0.524 0.288 0.534 0.000 1.000
Adj-R2 0.482 0.126 0.490 0.030 0.866

these two new factors add some explanatory power in the Chinese
market portfolio. The coefficient on RMWt shows that if there is one
percent change in the profitability factor, it would lead to 0.1953%
change in individual security excess return in the opposite direc-
tion. The investment factor (CMAt ) also possesses a statistically
significant relation with stock returns. The relations are quite
robust, because both RMWt and CMAt do not lost statistical sig-
nificance after adding the momentum factor. With inclusion of the
two new factors, HMLt still remains significant, suggesting that the
value factor is not redundant.
Specification (5) adds the momentum factor to the Fama and
French (2015) five-factor model. Consistent with Fama and French
(2015), the addition produces trivial changes in the model perfor-
mance. The six-factor performs as well as the Fama and French
(2015) five-factor model. Across these specifications, all factors
are significant at the 1% level, showing that stock returns in China
are strongly linked to the market, size, value, momentum, profit-
ability and investment factors8.
The results also present evidence of positive premium on the
market and size factors, and evidence of negative premium on the
value, profitability, investment, and momentum factors. Overall,
these results demonstrate that traditional asset pricing model
explain well the stock returns in China. Adding the profitability
8
However, Studies of Racicot and Rentz warn that the explanatory power of the
Fama and French (2015) model is quite reduced when accounting for possible
specification/errors in variables problems. Further research may be warranted to
validate the consistency of this result (Racicot & Rentz 2016, 2017).
factor RMW and the investment factor CMA slightly improves the
model performance. The explanatory power of the five-factor
model is slightly higher than conventional models. However,
other factors might exist as the intercepts are significantly positive
for all of these models.
4.2.2. Individual stocks
To see whether the model effectiveness still holds for individual
stocks, this section runs time series regressions for each individual
stock. Since the sample consists of 2368 firms over the 07/1994e12/
2016 period, a single model is estimated for 2368 times. These
regressions provide separately 2368 intercept values and associ-
ated statistics. From each regression, the intercept term, ai, and the
adjusted coefficient of determination, Adj-R2, are used to compare
the model performance. Coefficients of these regressions are
collected, and then related statistics for these estimates are
computed. Table 4 shows the results of regressing excess returns of
individual stocks on these asset pricing factors. The average ai is
close to zero in all model settings, ranging from 0.004 (for 3-factor)
to 0.014 (for CAPM). Moreover, the average ai is slightly greater than
the median, suggesting that the distribution of alphas is marginally
skewed to the right. Comparison of the minimum and maximum
values of ai confirms the positive skewness. Moreover, standard
deviations of ai from these models are approximately identical
(0.011e0.014). Fig. 1 shows the distributions of intercepts collected
from these regressions. Since the intercepts from these experi-
ments possess similar descriptive statistics, shapes of these distri-
butions are close. The observation reflects the empirical finding

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 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx 7

Fig. 1. Distributions of alphas from regressions for each stock.

that the Fama and French (2015) five-factor model only improves
past asset pricing models to some degree.
For the five models, the average Adj-R2 ranges from 0.317 to
0.482, where the 6-factor model achieves the highest Adj-R2 of
0.482 and the CAPM exhibits the lowest one of 0.317. The CAPM
appears to do a poor job in explaining the variation in returns. The
adjusted R2 dramatically increases to 0.465 when the Fama and
French (1993) three-factor model is adopted. When the Fama and
French (2015) five-factor model is employed, the average Adj-R2
across the 2368 firms achieves 0.477.
In addition to Adj-R2, effectiveness can be measured by focusing
on the models' intercepts, or alphas. The mean absolute value of
alphas (MAVA) should be zero if asset-pricing theory holds (Fama &
French, 2004). Therefore, the model with the smallest MAVA will be
judged the more effective model. As shown in Table 4, the results
from these regressions exhibit low MAVA for the intercepts. All of
the intercepts are close to zero, but statistically distinguished from
zero. We can see the Fama and French (1993) three-factor model
outperforms the CAPM with a MAVA of 0.008, which is approxi-
mately half of that of the CAPM. The result is consistent with Fama

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8 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx

Table 5
Influences Caused By Market Microstructure. This table investigates potential influences caused by market microstructure. The whole sample is divided into two groups:
stocks traded on Shanghai Stock Exchange and those on Shenzhen Stock Exchange. SMBt, HMLt, MOMt, RMWt and CMAt are respectively the size, value, momentum, profitability
and investment factors. Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1

Panel A: Shanghai Stock Exchange

VARIABLES (1) (2) (3) (4) (5)

CAPM FF3 Carhart4 FF5 ALL

MKT 1.0430*** 1.0046*** 1.0020*** 0.9763*** 0.9759***

(0.0033) (0.0032) (0.0033) (0.0036) (0.0036)
SMB 0.8417*** 0.8355*** 0.7338*** 0.7339***
(0.0074) (0.0074) (0.0094) (0.0094)
HML 0.0162* 0.0036 0.0013 0.0126
(0.0096) (0.0096) (0.0097) (0.0098)
RMW 0.1380*** 0.1239***
(0.0130) (0.0131)
CMA 0.0650*** 0.0746***
(0.0158) (0.0158)
MOM 0.0356*** 0.0307***
(0.0033) (0.0034)
Constant 0.0095*** 0.0021*** 0.0011*** 0.0032*** 0.0022***
(0.0003) (0.0003) (0.0003) (0.0003) (0.0003)
Observations 167,995 167,995 167,995 167,995 167,995
R-squared 0.3672 0.4264 0.4268 0.4276 0.4279

Panel B: Shenzhen Stock Exchange

VARIABLES (1) (2) (3) (4) (5)

CAPM FF3 Carhart4 FF5 ALL

MKT 0.9830*** 0.9386*** 0.9368*** 0.9195*** 0.9188***

(0.0046) (0.0044) (0.0044) (0.0049) (0.0049)
SMB 0.9794*** 0.9769*** 0.9367*** 0.9372***
(0.0101) (0.0101) (0.0128) (0.0128)
HML 0.0672*** 0.0758*** 0.0331** 0.0397***
(0.0130) (0.0132) (0.0133) (0.0134)
RMW 0.2490*** 0.2432***
(0.0182) (0.0183)
CMA 0.3414*** 0.3377***
(0.0217) (0.0218)
MOM 0.0213*** 0.0161***
(0.0048) (0.0048)
Constant 0.0132*** 0.0031*** 0.0024*** 0.0039*** 0.0034***
(0.0004) (0.0004) (0.0004) (0.0004) (0.0004)
Observations 158,759 158,759 158,759 158,759 158,759
R-squared 0.2249 0.2929 0.2930 0.2941 0.2941

Table 6
Marginal Effect of Listing in Shanghai Stock Exchange. Based on Table 5, this table further quantifies the marginal effect caused by listing on Shanghai Stock Exchange in
terms of the 6-factor model. SMBt, HMLt, MOMt, RMWt and CMAt are respectively the size, value, momentum, profitability and investment factors.

VARIABLES Coef. Std. Err. t P>jtj [95% Conf. Interval] F

Constant 0.0020 0.0005 3.7950 0.0001 0.0030 0.0009 14.4019

MKT 0.0505 0.0059 8.5170 0.0000 0.0389 0.0621 72.5386
SMB 0.2767 0.0154 18.0147 0.0000 0.3068 0.2466 324.5284
HML 0.0890 0.0161 5.5169 0.0000 0.0574 0.1206 30.4357
MOM 0.1187 0.0218 5.4354 0.0000 0.0759 0.1616 29.5435
RMW 0.4893 0.0261 18.7844 0.0000 0.4383 0.5404 352.8518
CMA 0.0326 0.0057 5.7228 0.0000 0.0437 0.0214 32.7505

and French (1996). However, the introduction of the momentum,
profitability, and investment factors do not improve the original
three-factor model in terms of MAVA. If judged by the value of the
intercepts, the Fama and French (1993) three-factor model captures
most of the variation in average returns on Chinese stocks. The
results are consistent if the number of significant alphas is used to
compare model performance.
9
The Shenzhen Stock Exchange hosts the Small Medium Enterprise Board (SME)
and the Growth Enterprise Board (GEB).
4.3. Market microstructure
Chinese shares can be traded on either the Shanghai Stock Ex-
change or the Shenzhen Stock Exchange9. Between the two ex-
changes appear several important differences, which might
potentially affect the model performance. For example, capitaliza-
tion of the Shanghai Stock Exchange is larger than that of the
Shenzhen Stock Exchange. Additionally, firms listed on the
Shanghai Stock Exchange are mainly state-owned enterprises,
while those on the Shenzhen Stock Exchange mainly engage in
manufacturing and exporting. In addition, export-oriented firms on
the Shenzhen Stock Exchange tend to possess closer connection

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 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx 9

Table 7
Influences Caused By Share-Structure Reform. This table investigates potential influences caused by Share-Structure Reform. Panel A reports estimates over the pre-reform
period, 06/1994e04/2015, while panel B reports estimates over the post-reform period, 2006/03e2016/12. SMBt, HMLt, MOMt, RMWt and CMAt are respectively the size, value,
momentum, profitability and investment factors. Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1

Panel A Before Reform 2005-04

VARIABLES (1) (2) (3) (4) (5)

CAPM FF3 Carhart4 FF5 ALL

MKT 0.9888*** 0.9382*** 0.9374*** 0.9345*** 0.9310***

(0.0033) (0.0041) (0.0041) (0.0045) (0.0045)
SMB 0.3376*** 0.3205*** 0.3060*** 0.2859***
(0.0087) (0.0087) (0.0101) (0.0102)
HML 0.0042 0.0036 0.0345*** 0.0286***
(0.0104) (0.0104) (0.0106) (0.0106)
RMW 0.2166*** 0.1914***
(0.0122) (0.0123)
CMA 0.2530*** 0.2040***
(0.0161) (0.0163)
MOM 0.0478*** 0.0430***
(0.0024) (0.0025)
Constant 0.0001 0.0009*** 0.0036*** 0.0005 0.0029***
(0.0003) (0.0003) (0.0003) (0.0003) (0.0004)
Observations 98,651 98,651 98,651 98,651 98,651
R-squared 0.4802 0.4884 0.4904 0.4900 0.4916

Panel B After Reform 2006/03e2016/12

VARIABLES (1) (2) (3) (4) (5)

CAPM FF3 Carhart4 FF5 ALL

MKT 1.0334*** 1.0469*** 1.0432*** 1.0263*** 1.0260***

(0.0038) (0.0036) (0.0036) (0.0041) (0.0041)
SMB 1.1267*** 1.1182*** 0.8921*** 0.8945***
(0.0084) (0.0084) (0.0119) (0.0119)
HML 0.0765*** 0.1141*** 0.2207*** 0.2292***
(0.0113) (0.0119) (0.0121) (0.0125)
RMW 0.1948*** 0.1887***
(0.0166) (0.0168)
CMA 0.3756*** 0.3721***
(0.0197) (0.0197)
MOM 0.0679*** 0.0196***
(0.0070) (0.0072)
Constant 0.0173*** 0.0023*** 0.0010*** 0.0042*** 0.0038***
(0.0003) (0.0003) (0.0003) (0.0003) (0.0004)
Observations 239,353 239,353 239,353 239,353 239,353
R-squared 0.2334 0.3314 0.3316 0.3345 0.3346

Table 8
Marginal Effect of Share-Structure Reform. Based on Table 7, this table further quantifies the marginal effect caused by Share-Structure Reform. SMBt, HMLt, MOMt, RMWt and
CMAt are respectively the size, value, momentum, profitability and investment factors.

VARIABLES Coef. Std. Err. t P>jtj [95% Conf. Interval] F-value

Constant 0.0060 0.0006 10.8074 0.0000 0.0049 0.0071 116.7998

MKT 0.0991 0.0068 14.5092 0.0000 0.0857 0.1125 210.5161
SMB 0.5418 0.0169 31.9867 0.0000 0.5086 0.5750 1023.1467
HML 0.2621 0.0180 14.5338 0.0000 0.2974 0.2267 211.2312
MOM 0.0265 0.0223 1.1864 0.2355 0.0173 0.0702 1.4075
RMW 0.6199 0.0281 22.0530 0.0000 0.5648 0.6750 486.3340
CMA 0.0233 0.0073 3.1933 0.0014 0.0090 0.0377 10.1969

with foreign and institutional investors, resulting in different de-
gree of information asymmetry from those on the Shanghai Stock
Exchange.
This section considers potential influences caused by market
microstructure, and tries to examine whether the regression co-
efficients vary with stock exchanges. To serve the purpose, the
whole sample is divided into two groups: stocks traded on the
Shanghai Stock Exchange and those on the Shenzhen Stock Ex-
change. Then, the Chow test is conducted to examine whether the
coefficients estimated over these groups are equal.
Table 5 shows the results, where we can see noticeable differ-
ences between the two stock exchanges. Overall, the estimation
results for Shenzhen Stock Exchange are quite consistent with
those for the whole sample, as shown in panel B. Both sign and
significance remain the same, but the Adj-R2 for each model drops,
implying that these asset pricing models explain limited variations
in stock returns for shares traded on the Shenzhen Stock Exchange.
In contrast, these models offer relatively high Adj-R2 for the
Shanghai Stock Exchange, with some changed coefficients. As
shown in panel A, the value factor (HMLt ) is no longer significant at
the 5% level. Accordingly, the value effect cannot explain the cross-
sectional variation of stocks on the Shanghai Stock Exchange.
Moreover, the coefficients on the investment factor (CMAt ) turn to
negative ones. These results suggest that the value effect is weak in
the Shenzhen Stock Exchange and that the investment behavior
probably differs due to the stock exchange where the shares are

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10 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx

Table 9
This table examines model performance in each year of the sample period, focusing on the 6-factor model. SMBt, HMLt, MOMt, RMWt and CMAt are respectively the size, value,
momentum, profitability and investment factors. N denotes the number of observation used in each regression. Adj-R2 is the adjusted coefficient of determination. Standard
errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1

Year Coefficient t-value N Adj-R2

MKT SMB HML RMW CMA MOM cons MKT SMB HML RMW CMA MOM cons

1994 1.350 1.065 2.824 1.592 1.641 0.000 0.098 4.786 1.263 1.086 0.931 1.213 . 1.119 1475 0.824
1995 0.850 0.007 0.015 0.166 0.063 0.052 0.012 28.236 0.061 0.201 3.260 0.535 5.326 4.545 3117 0.569
1996 0.871 0.345 0.042 0.563 0.189 0.021 0.011 23.566 4.487 0.609 10.621 2.267 2.178 1.940 3928 0.360
1997 1.085 0.156 0.810 0.816 1.331 0.020 0.014 49.699 3.023 6.086 10.552 15.258 2.204 5.943 6466 0.359
1998 0.970 0.566 0.117 0.076 0.406 0.017 0.004 40.603 12.140 1.625 0.607 3.455 1.530 1.847 8051 0.344
1999 0.847 0.240 0.233 0.153 0.472 0.208 0.007 37.742 3.307 2.700 0.981 3.776 4.462 3.698 9153 0.492
2000 1.084 0.616 0.175 0.369 0.305 0.056 0.007 35.348 6.349 1.842 2.448 1.857 1.194 1.549 10256 0.156
2001 0.907 0.431 0.140 0.109 0.080 0.052 0.007 31.298 6.890 1.809 1.161 0.560 1.726 3.381 11700 0.437
2002 1.037 0.481 0.322 0.367 0.375 0.072 0.001 76.677 12.628 4.909 3.578 2.085 2.028 0.817 12343 0.556
2003 0.927 0.146 0.570 0.578 0.113 0.125 0.002 37.285 1.250 5.534 5.033 0.406 2.445 2.014 13108 0.280
2004 1.252 0.441 0.224 0.095 0.906 0.151 0.014 49.671 6.730 2.640 0.769 5.662 4.418 11.438 14126 0.440
2005 1.032 0.775 0.593 0.017 0.129 0.079 0.007 70.540 17.281 6.087 0.204 1.067 1.333 4.695 14807 0.422
2006 0.866 1.157 0.084 0.673 1.076 0.032 0.012 25.224 16.263 0.815 4.539 11.036 0.589 7.201 14587 0.172
2007 1.137 0.307 0.962 0.133 2.373 0.222 0.006 35.652 2.714 9.530 1.317 20.108 3.854 0.992 15452 0.280
2008 1.262 0.306 1.586 1.304 0.783 0.517 0.030 90.201 5.060 20.165 16.884 10.290 11.237 15.375 16786 0.480
2009 1.174 1.112 0.101 0.604 0.380 0.256 0.009 46.081 16.213 0.910 6.220 3.320 4.335 2.975 17628 0.135
2010 0.973 0.836 0.016 0.366 0.041 0.148 0.007 35.409 20.971 0.253 3.430 0.375 3.504 4.631 20337 0.311
2011 1.068 0.854 0.446 0.240 0.188 0.183 0.001 45.444 12.281 9.543 3.875 2.478 6.629 0.697 24127 0.293
2012 1.103 1.101 0.200 0.037 1.105 0.305 0.002 74.645 27.993 4.366 0.395 8.258 5.410 2.007 26834 0.324
2013 1.104 0.841 0.433 0.186 0.693 0.464 0.006 35.623 7.829 3.465 2.215 4.096 8.755 2.784 27468 0.322
2014 1.030 0.646 0.278 0.262 0.007 0.192 0.008 34.204 10.952 3.277 2.393 0.069 6.540 5.823 26694 0.133
2015 0.972 0.695 0.290 0.403 0.218 0.018 0.012 40.843 13.320 5.413 6.291 3.455 0.609 6.291 25477 0.337
2016 1.020 0.563 0.539 0.032 0.028 0.062 0.006 57.293 10.801 6.055 0.317 0.211 1.333 3.490 26405 0.538

Fig. 2. Time Series of Adj-R2 and Alpha over the Sample Period. The solid line with
circle represents alphas, while the dash line with squares represents the adj-R2.
traded.
Table 6 quantifies the marginal impacts caused by the Shanghai
Stock Exchange. The results indicate that on the Shanghai Stock
Exchange, all of these asset pricing factors produce impacts
different from on the Shenzhen Stock Exchange, SME, and the GEB.
A joint test of all coefficients produces F(7, 350313) ¼ 203.51901,
rejecting the null hypothesis that the coefficients estimated over
these two stock exchanges are equal. Therefore, the segmentation
between the two exchanges is apparent in the model performance.
4.4. Share-Structure Reform
The Chinese stock market has been experiencing dramatic
changes since its establishment in 1990. Several events probably
influence the model performance. One noticeable event is the
Share-Structure Reform, which is initiated in April 2005. Before
then, about two thirds of outstanding shares in the Chinese stock
market are not publicly tradable. These shares are mainly held by
government agencies or government-related enterprises. In March
of 2006, the reform completes, and these non-tradable shares are
legally converted to tradable shares. Therefore, a structural change
probably occurs in these models. This section examines the impacts
of Share-Structure Reform by separating the sample into two time
periods: 1994/07e2015/04 and 2006/03e2016/12. Then, re-
gressions for each model are repeated for each sub-period.
Table 7 shows the estimation results. These asset pricing models
yield distinguishable differences between the two periods. The
estimated coefficients on SMBt for the pre-reform period are
noticeably less than those for the post-reform period. The co-
efficients on HMLt turn to be negative after the share-structure
reform. The sign of coefficients on CMAt also changes due to the
Share-Structure Reform. As shown in Table 8, the Chow test further
confirms a structural change in the model performance (F(7,
350313) ¼ 980.1025). The results indicate that the Share-Structure
Reform have a profound impact on the Chinese stock market, and
could probably explain why the model performance is sensitive to
sample selection.
4.5. Sub-period analysis
This section further examines the stability of model perfor-
mance across years. It is important to see whether the model per-
formance is a function of the number of observations, or a specific
time period. Similar regression analyses are repeated year by year.
This analytic procedure enables us to observe whether structural
changes exist in the explanatory power of the asset pricing model
due to Share-Structure Reform. Moreover, the procedure can be
used to capture the influences of the 2008 Financial Tsunami and
the 2011 European Sovereign Debt Crisis on our estimation results.
Table 9 presents the regression results for each year of the sample
period. Fig. 2 plots a line chart of the time series for alpha and
adjusted R2. We can see that the adjusted R2 is relatively higher
during the early years of the sample period, particularly in the first
two years. At the initial stage of market formation, only a couple of
firms are listed on stock exchanges, which exhibit similar

Please cite this article as: Huang, T.-L., Is the Fama and French five-factor model robust in the Chinese stock market?, Asia Pacific Management
Review, https://doi.org/10.1016/j.apmrv.2018.10.002
 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx
Fig. 3. Time series of coefficients on asset pricing factors over the sample period.
attributes. The lack of diversity might explain why the model
possesses a high adjusted-R2. After the beginning, the value of
adjusted-R2 drops remarkably to a level of about 0.4. Then, it
maintains at this level but simultaneously shows variability before
the Share-Structure Reform. After the Share-Structure Reform, the
value of adjusted-R2 fluctuates around 0.3. Overall, the mean values
of adjusted-R2 are slightly higher in the first half of the sample
period.
Fig. 3 shows the dynamics of these factor coefficients. We can
see that the influence of the market risk, MKTt , is relatively stable.
The coefficients on the size factor (SMBt ) and those on the value
factor (HMLt ) are generally positive and negative, respectively. The
sign of coefficients on the investment factor (CMAt ) and that on the
profitability factor (RMWt ) are time-varying. The coefficients on the
momentum factor (MOMt ) are close to zero. Overall, these patterns
confirm the empirical findings.
5. Conclusions
Focusing on the Chinese stock market, this paper compares
performance of traditional asset pricing models, such as the Sharpe
(1964)- Lintner (1965) capital asset pricing model (CAPM), the
Fama and French (1993) three-factor model, the Carhart (1997)
four-factor model, and the Fama and French (2015) five-factor
model. In contrast to past studies that use portfolio returns as the
dependent variable, this study employs returns on individual stocks
as the dependent variable. As expected, the explanatory power of
risk factors drops when the explained variable is stock returns
rather than portfolio returns.
Overall, the five-factor model performs better than other
models when explaining individual stock returns. However, the
addition of the investment and profitability factors just slightly
improves the model performance, implying that both factors offer
incremental but small explanatory power for stock returns. The
result that average returns on the profitability and investment
factors are small for Chinese stocks also supports this conclusion.
Please cite this article as: Huang, T.-L., Is the Fama and French five-factor model robust in the Chinese stock market?, Asia Pacific Management
Review, https://doi.org/10.1016/j.apmrv.2018.10.002
11
Moreover, the size effect is consistent and significant across all
settings considered in the study. The value effect is relatively weak,
and seems to be absent on the Shanghai Stock Exchange. The study
also reveals strong price reversals in the Chinese market, indicating
the invalidity of the momentum factor.
On the other hand, the results indicate that the model perfor-
mance differs with sample selection. Some special features of
Chinese stock markets are found to affect the model performance.
Both size and value effects are stronger on the Shenzhen Stock
Exchange than on the Shanghai Stock Exchange. The investment
factor also exhibits different impacts on these stock exchanges. The
difference might be caused by potential influences of market
microstructure. In addition, the implementation of Share-Structure
Reform in 2005 also causes a structural change in the model per-
formance, which strengthens the impacts on these asset pricing
factors. The sub-period analysis reveals that the explanatory power
of the five-factor model varies with time. These are possible pitfalls
that arise in the application of the five-factor model to Chinese
stock returns.
This paper has explored main issues concerning the relationship
between conventional asset pricing factors and stock returns in
China. However, much remains to be answered because of several
limitations to this study. Due to data of varied quality or different
sample periods, extant empirical works on the Chinese stock
market tend to obtain inconsistent results. Although this study
cautiously followed Fama and French (2015) to treat factor returns,
due to special features of the Chinese stock market, the ways of
constructing these pricing factors might affect model performance.
Therefore, how the formation of pricing factors influences stock
returns or whether other crucial pricing factors exist in the Chinese
stock market would be interesting topics.
Acknowledgments
The author would like to especially thank the anonymous ref-
erees for their valuable suggestions and helpful comments, which
12 T.-L. Huang / Asia Pacific Management Review xxx (xxxx) xxx
greatly enrich the study. All errors that remain are my own.
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