Bridge over ocean
1 November 2004 Financial Analysts Journal Volume 60, Issue 6

What Determines Chinese Stock Returns?

  1. Fenghua Wang
  2. Yexiao Xu

This study applied the three-factor model to A-shares in the Chinese equity market, one of the fastest growing markets ever. The sample period is July 1996 through June 2002. Size was found to explain the cross-sectional differences in returns, but contrary to findings for the U.S. market, the book-to-market ratio was not helpful. As in the U.S. experience, beta did not account for return differences among individual stocks. Because of the speculative nature of Chinese capital markets, the large proportion of government-owned shares, and the low quality of the companies' accounting information, the free float (that is, the ratio of shares in a public company that are freely available to the investing public to total company shares) was added to the study to serve as a proxy for company fundamentals. The three-factor model that included proxies for size and free float significantly increased the explanatory power of the market model—from 81 percent to 90 percent.

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