Stock Exchange and Industry Effects on A-Shares in China
Date Issued
2015
Date
2015
Author(s)
Chen, Yu-Ting
Abstract
The capital market in China developed rapidly in 1990s and after two more decades, the total market capitalization of Shanghai Stock Exchange and Shenzhen Stock Exchange both ranked top 10 out of all exchanges in the world. Hence, identifying the factors that would affect the stock returns in these two exchanges has already become a very important issue for international investors. This thesis focuses mainly on how exchange factor and industry factor impact the stock returns of A-Shares in both Shanghai and Shenzhen Stock Exchanges. We select data from January 1, 1994 to December 31, 2014 and use monthly simple rate of return data to conduct the empirical study within the 21-year span. In order to identify key factors that would impact the stock returns of A-Shares, this thesis first examines the applicability of the Fama-French Three-Factor Model on both Shanghai and Shenzhen Stock Exchanges and we observe whether the characteristics differ in different exchanges and different industries. Next, we use the exchange factor and industry factor to capture the excess returns that cannot be explained by market risk factor, scale factor and value factor. The conclusion can be summarized as the follows： 1. Fama-French Three-Factor Model can capture around 50% of the stock returns of A-Shares in China. Among the three factors, the market risk factor is the most important one and has similar effects on both Shanghai Stock Exchange and Shenzhen Stock Exchange. However, for scale factor and value factor, there are significantly different impacts on the two stock exchanges. What’s more, there are also significant differences among 19 industries in China. It gives an indication that both exchange factor and industry factor are important factors for the A-Shares in China. As a result, we conduct further research on the exact impact of these two factors. 2. Exchange factor and industry factor can explain about 10% of the excess return that cannot be captured by the Fama-French three factors. Besides, the empirical result shows that there is “Shenzhen stock exchange effect in China. Also, some industries enjoy premium effects as well, such as the Finance industry. 3. The China Securities Regulatory Commission released the Share-trading Reform of Listed Companies in 2005. Hence, we split the time span into two parts, early stage and late stage. The empirical result shows that there is no significant difference in early stage and in late stage in terms of the explanatory power of the Fama-French Three-Factor Model. However, in late stage, the exchange factor and industry factor have better explanatory power of the stock returns of A-Shares in China. On top of that, we also discuss how these factors behave during bull market and bear market. The empirical result shows that Fama-French Three-Factor Model has better explanatory power during bear market. As for the exchange factor and industry factor, there is no significant difference between these two periods; however, it is worth mentioning that certain industries enjoy excess return during bull market but in bear market, there is no industry that has this kind of effects.
Subjects
Market Segmentation
Excess Return
Three-Factor Model
Exchange Factor
Industry Factor
Type
thesis