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Evaluating asset pricing models: A revised factor model for China

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  • Li, Zhiyong
  • Rao, Xiao

Abstract

We develop a revised factor model, accounting for unique features of Chinese markets, and evaluate the performance of competing asset pricing models. Extant literature reveals that eliminating the smallest 30% of stocks improves the performance of factor models. The revised factor model excludes firms with a high expected probability of becoming shells, which are companies valued as shells in reverse mergers serving as an alternative way to go public. Our revised model has the smallest model specification errors and the best explanatory power among various constructed portfolios. This new finding suggests that our model offers an effective benchmark model for empirical asset pricing in the Chinese stock market.

Suggested Citation

  • Li, Zhiyong & Rao, Xiao, 2022. "Evaluating asset pricing models: A revised factor model for China," Economic Modelling, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:ecmode:v:116:y:2022:i:c:s0264999322002425
    DOI: 10.1016/j.econmod.2022.106001
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    Cited by:

    1. Long, Yunshen & Yan, Jingzhou & Wu, Liang & Long, Xingchen, 2024. "Market price determination: Interpreting quote order imbalance under zero-profit equilibrium," Economic Modelling, Elsevier, vol. 134(C).
    2. Li, Zhiyong & Wan, Yifan & Wang, Tianyi & Yu, Mei, 2023. "Factor-timing in the Chinese factor zoo: The role of economic policy uncertainty," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    3. Zhang, Wei & He, Jie & Ge, Chanyuan & Xue, Rui, 2022. "Real-time macroeconomic monitoring using mixed frequency data: Evidence from China," Economic Modelling, Elsevier, vol. 117(C).
    4. Yu, Lu & Li, Yanglin, 2023. "Testing factor models when asset bubbles occur: A time-varying perspective," Economic Modelling, Elsevier, vol. 124(C).

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    More about this item

    Keywords

    Shell value; Chinese IPO System; Factor models; Anomalies;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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