Factor models for Chinese A-shares

We compare the performance of commonly employed asset pricing models on a large, liquid, but mostly segmented Chinese A-shares equity market. When restricting ourselves to factor models developed for the U.S. equity market, the q-factor model performs well. However, it is outperformed by a modified Fama-French sixfactor model and by a four-factor asset pricing model tailored to the Chinese A-shares market. A data-driven method results in a seven-factor model, however the ranking of asset pricing models changes when we incorporate transaction costs. Both direct and data-driven model comparison methods now lead to a three-factor model comprising a market, size, and earnings-based value factor.

Automated summary

This study compares commonly employed asset pricing models in the Chinese A-shares market and finds that the q-factor model performs well when using factor models developed for the U.S. equity market. However, the ranking of asset pricing models changes when transaction costs are considered, resulting in a three-factor model comprising a market, size, and earnings-based value factor.