A Study of Stock Returns in China's A-share Market Based on the Fama-French Three-factor Model

In recent years, the world's financial boom, all kinds of financial products are emerging, how to rationalize the pricing of financial assets, is a new test of asset pricing theory. The capital asset pricing model of the 1970s, although set up rigorously, many studies have shown that it is unable to fully explain the stock returns. In view of this, academics began to explore other variables affecting stock returns and gradually focused on multifactor models. In this regard, the Fama-French three-factor model stands out. In addition to focusing on the impact of the market premium factor on stock returns, it also simultaneously takes into account that the market capitalization factor and the book-to-market ratio factor also have a significant impact on stock returns. Although the explanatory power of the Fama-French three-factor model on stock returns has been verified in major developed capital markets abroad. However, when applying the three-factor model to the Chinese market, the views of various scholars are different. This paper examines the data of SSE A-shares for the past 10 years and tests the adaptability of the three-factor model in the Chinese market with monthly data, and finds that the market premium factor and the market capitalization factor are significantly effective in explaining stock returns, in contrast, the book-to-market ratio factor is relatively weak in its ability to explain stock returns.