Factor Analysis of the Chinese Stock Market

Mads Dalsgaard Yrfelt

Student thesis: Master thesis


Being home to the world’s largest population and 2ndlargest economy, China has received much attention from abroad in recent years and investors are being recommended to shift parts of their equity allocation into Chinese equities. Hence, this master’s thesis has performed a comprehensive factor analysis of the Chinese stock market in order to examine how foreign investors should implement Chinese equities into their portfolios. By taken the point of departure in the solid theoretical foundation of asset pricing models, the nature of this research paper has been to empirically explore the factor approach in a Chinese setting, which has been neglected to a large extent in past research. In order to conduct such an analysis, a China-specific methodology has been adopted combining state-of-the-art methodology of past research to construct the following risk factors: The market, size, value, momentum, profitability,and investment. However, due to certain limitations, it is only the stocks listed on the Shanghai Stock Exchange that have been analyzed in this study.
Based on a sample period from 2012 to 2020, the study has found that none of the risk factors examined are statistically significant on the Shanghai Stock Exchange. However, as the average returns of the market, value and profitability factors all are relatively high, implementing an investment strategy by buying long the market, value-and robust profitable stocks while entering short positions in growth-and weak profitable stocks will turn out profitable. Importantly to foreign investors, the findings of the study have further outlined that the risk factors depend on the general performance of the stock market. Thus, depending on the investment horizon, risk preference and whether the investor believes it is possible to predict the future performance of the market, the investor should choose to either stay invested in the factors over the long, or implement a dynamic investment strategy that depends on the future market performance. Lastly, the performance of the asset pricing models concludes that the Fama-French five-factor model is the best in explaining the anomalies of the excess returns on the Shanghai Stock Exchange, which supports the need of including these five factors into the investor’s investment strategy in order to beat the market;however, the impact of the investment factor is questionable.
Nevertheless, research that includes a longer sample period is needed in order to further enhance the recommendations to investors seeking to benefit from the characteristics of Chinese equities.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2020
Number of pages83