Do factor models explain stock returns when prices behave explosively? Evidence from China

Shaoping Wang, Lu Yu and Qing Zhao

Pacific-Basin Finance Journal, 2021, vol. 67, issue C

Abstract: We test the Fama-French five-factor model when stock prices exhibit explosive (or bubble) behavior. Using the Backward Sup Augmented Dickey-Fuller (BSADF) statistic, we identify the bubble period for China's A-share stock market from September 2014 to June 2015. The model explains cross-sectional stock returns during the bubble period, but the explanatory power of the five-factor model declines as prices change from the random walk period to the bubble period. Furthermore, the marginal pricing ability of the five factors also decreases substantially in the bubble period. The speculative investor behavior may explain the declined explanatory power of the model during the bubble.

Keywords: Fama-French factors; Asset pricing; Bubbles; Explosive process; Marginal pricing ability (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:67:y:2021:i:c:s0927538x21000421

DOI: 10.1016/j.pacfin.2021.101535

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