An Adjusted Factor Model Based on China’s Stock Market

Abstract

In this paper, I use the government ownership to build an adjusted factor model for stocks in China’s stock market. Two methods are used to build the government ownership factor. The empirical results show that the adjusted five-factor model with government ownership factor improves the FF-3 and Carhart-4 model slightly. Also, the two factors cannot be explained by the factors in FF-3 and Carhart-4 models, separately or together, while these two factors can explain some factors in FF-3 and Carhart-4 models in return. The GRS test gives further evidence that the government ownership factor in China can explain Carhart-4 factors to some extent. Also, the factor models with government ownership factor improve the explanatory power of profitability and investment anomalies. Finally, two robustness checks are taken. This paper shows that the government ownership factor is an effective factor in China’s stock market, and the adjusted factor model with government ownership factor improves the explanatory power of the Carhart-4 model.