A New Four-factor Model for the Chinese Stock Market

Heping Xiong (), Chao Tang, Jianhui Cao and Haitao Zhang
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Heping Xiong: Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China
Chao Tang: Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China
Jianhui Cao: Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China
Haitao Zhang: Department of Finance, Economics and Management School, Wuhan University, Hubei 400072, China

Annals of Economics and Finance, 2025, vol. 26, issue 2, 853-890

Abstract: We generate a fundamental signal library containing over 8,000 fundamental signals in the Chinese stock market. Two tests are conducted to identify anomalies within this signal library. Out of these, 142 signals pass both tests. We apply several aggregation techniques to extract information from the signals and find that principal component analysis performs the best. Further-more, we construct a factor based on the 142 signals and augment the Fama French three-factor model to create a four-factor model, which performs better than the Fama-French three-factor model, the Carhart four-factor model, the Q4 factor model, the Fama-French five-factor model, and performs at least as well as the Fama-French six-factor model.

Keywords: Data-mining; Anomalies; Cross-Section of Returns; Chinese Stock Market (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2025
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