Empirical analysis of cross-section returns in chinese stock market

By adding the trading volume, this paper extends the three-factor model (Fama and French, 1993) to study cross-section returns based on the upstream and downstream markets. The aims are to overcome the negative influence of using pre-period returns to substitute expected returns, and test whether explanatory powers of the trading volume and book-at-market ratio result from the overreaction of the investors. The empirical analysis according to Chinese stock markets shows that: (1) comparing to the other variables, the trading volume has a more significant positive correlation with cross-section returns; (2) the empirical results from distinguished markets are more reliable; (3) the overreaction of the investors is found in Chinese stock markets.