An Application of Multi-Factor Model on Anomaly in China Stock Market

Abstract

The traditional finance theories have been foundational in understanding financial markets. However, the discovery of anomalies has posed challenges to the established theories. These anomalies, including the equity premium puzzle, scale effect, overreaction, and reversal effect, have questioned classical finance theories. In response to these challenges, the field of behavioral finance emerged, offering insights into market behavior from the perspective of investor psychology and cognitive biases. Our paper contributes to this ongoing dialogue by examining 37 anomalies in the Chinese stock market. It seeks to understand the existence of these anomalies and evaluate the ability of asset pricing models to explain them. Our findings suggest that these models have substantial explanatory power, offering valuable insights for wealth management institutions in attributing investment performance. We underscores the importance of continuously refining financial theories to better capture the complexities of real-world markets and informs practical investment strategies in an ever-changing landscape.