Factor models for Chinese A-shares

We compare the pricing ability of popular asset pricing models for the cross-section of U.S. equities on a large, liquid, but mostly segmented equity market of Chinese A-shares. The q-factor model performs well among factor models developed for the U.S. equity market, but is outperformed by a modified Fama-French six-factor model and by a four-factor asset pricing model adapted to the Chinese A-shares market. A data-driven method to detect the preferred asset pricing model results in the same four factors, plus three additional ones. However, these three additional factors do not reduce the pricing errors to a set of test assets. When taking transaction costs into account, the ranking of asset pricing models changes. The preferred model from both the direct and data-driven model comparison methods now consists of a three-factor model comprising the market, size, and an earnings-based value factor