AEMPS

Applicability Analysis of Multi-Factor Models in China's STAR Market—An Empirical Comparison Based on CAPM, Fama-French Three-Factor and Five-Factor Models

Author

Mo Li * 1

1 Jiangxi University of Finance and Economics

Corresponding Author

Mo Li

Keywords

STAR Market, Asset Pricing, Fama-French Model, Multi-Factor Model, Factor Risk Premium

Abstract

This paper examines 606 listed companies on the STAR Market from August 2020 to December 2024 and systematically tests the applicability of the CAPM, the Fama-French three-factor model, and the five-factor model in this emerging market. This paper constructed the size factor using log-transformed market capitalization, proxy the book-to-market ratio with the inverse of the price-to-book ratio to build the value factor, and construct the profitability and investment factors based on return on equity and total asset growth rate, respectively. The empirical analysis employs time-series regression, the Fama-MacBeth cross-sectional regression, and sub-sample robustness tests. The results show that the CAPM exhibits significantly insufficient explanatory power in the STAR Market, with an average R² of merely 0.015. The three-factor model improves explanatory power by approximately 19 times compared with the CAPM, and both the size and value factors demonstrate significant explanatory power, though the value premium direction is opposite to that in the main board market. The five-factor model achieves a marginal increment of 15.0%, while the profitability and investment factors show relatively limited explanatory power. Factor risk premiums fail to reach conventional significance levels due to the short sample period, but sub-sample robustness tests confirm the stability of this conclusions. This study provides empirical references for investor risk management and regulatory efforts to improve the multi-tier capital market structure.

Citation

Mo Li. Applicability Analysis of Multi-Factor Models in China's STAR Market—An Empirical Comparison Based on CAPM, Fama-French Three-Factor and Five-Factor Models. AEMPS (2026) Vol. 283: 232-240. DOI: 10.54254/2754-1169/2026.35361.

References

[1]: Lam, K. S. K., & Tam, L. H. K. (2011). Liquidity and asset pricing: Evidence from the Hong Kong stock market.Journal of Banking & Finance, 35(9), 2217–2230.

[2]: Gu, L. Y. (2022).Research on factors affecting STAR Market stock returns—Based on the Fama-French multi-factor model[Master's thesis]. Shanghai Normal University.

[3]: Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds.Journal of Financial Economics, 33(1), 3–56.

[4]: Xu, J. Y. (2022).Empirical research on liquidity-adjusted Fama-French model in the STAR Market[Master's thesis]. Shanghai Normal University.

[5]: Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time-series effects.Journal of Financial Markets, 5(1), 31–56.

[6]: Xu, X. Y. (2022).Comparative study of multi-factor pricing models in the STAR Market—Based on earnings-to-price ratio and turnover rate factors[Master's thesis]. Shanghai Normal University.

[7]: Tang, S. (2023). Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market.International Review of Financial Analysis, 89, 102747.

[8]: Su, S., et al. (2022). Asset pricing in China's A-share market: A factor approach.Pacific-Basin Finance Journal, 73, 101762.

[9]: Li, X., & Rao, Y. (2022). Factor pricing in the Chinese stock market.International Review of Financial Analysis, 82, 102202.

[10]: Hanauer, M. X., et al. (2024). The cross-section of stock returns in the Chinese A-share market.Journal of Banking & Finance, 158, 107024.

[11]: Wang, Y., et al. (2023). Factor models and the Chinese stock market.Emerging Markets Review, 68, 101123.

[12]: Chen, L., et al. (2023). Fama-French models in China's A-share market: An empirical study 2017-2022.Finance Research Letters, 52, 103612.

Copyright © 2021 Eliwise Academy. Unless Otherwise Stated