Industry Prosperity and Stock Return: Evidence from China’s Real Estate Industry

The influencing factors of capital asset pricing have been a hot topic in academic research, yet the practice of incorporating industry prosperity into factor models for quantitative analysis is limited. By creating a new factor based on the National Real Estate Climate Index and adding it to the Fama-French three-factor model (FF3), this study focuses on China’s real estate sector and examines the impact of industry prosperity on capital asset pricing. Empirical findings from the real estate sector of China’s A-share market include: (1) The FF3 shows good applicability, with a positive market premium, a negative size premium and a negative value premium; (2) A rise in industry prosperity has a significant negative impact on the excess returns for the next period on low book-to-market stocks and large-cap stocks with a medium book-to-market ratio; (3) Industry prosperity has some interactive effects on the FF3 factors. The objectives of this study are to fill the research gap, to support investment strategy optimization, and to serve as a guide for policy practices.