Analysis of Three Factors Model in Chinese Stock Market

The three - factor model, established by Fama and French, suggests two system risk factors related to size and book-market equity play an important role in stock pricing besides market risk. The model is considered to describe cross-sec- tional stock price behavior better than traditional CAPM. Based on this model, in this paper we discuss asset-pricing problem in Chinese stock market. We find that the three-factor model is unsuitable for Chinese security market instead. A two-factor mod- el, which includes market risk factor and other system risk factor related size, captures cress-sectional stock price behavior.