ABSTRACT Asset pricing theory is one of the key contents of financial theory.More than 4 decades before,the capital asset pricing model(CAPM)of William Sharp (1964)and John Lintner (1965)marks the birth of asset pricing theory.From then on,it draws great attraction and is still widely used in applications until now.With the development of asset pricing theory, unfortunately,the empirical record of Sharp-Lintner CAPM is poor.Evidence mounts that much of the variation in expected return is unrelated to market beta while related to firm characteristic which we called it anomaly.So many researches on how to improve CAPM and try to explain the stock average returns especially anomaly from various aspects,such as rational asset-pricing stories and irrational asset-pricing stories.Among those,three-factor model and characteristic model is the prominent representation. China established two securities exchanges in the early 1990s,the Shanghai Stock Exchange in December 1990 and the Shenzhen Stock Exchange in July 1991.These markets have since expanded very rapidly.With the increasing of the number of listed firms,research of asset pricing are widely used in applications concentrated on China Stock Market.Based on the sampling A-share listed firms from the Shanghai and Shenzhen Stock Markets for the period from January 1995 to June 2006,this thesis sort portfolios,examine the book-to-market equity effect,size effect,and compare three asset pricing models-CAPM,three-factor model and characteristic model. This thesis is organized into five sections.Section one covers a brief literature review of asset pricing and anomaly.It mainly introduces the birth of asset pricing theory and the study contents in different period at home and abroad,including the conclusions of empirical analyses.Section two introduces the test methods of CAPM,book-to-market,size anomaly, especially the definition of variables and test standards which are used in this article.Section three empirically analyzes the book-to-market effect,size effect,and CAPM.Empirical results suggest that the three-factor model is better than CAPM in China.Section four empirically analyzes the three-factor model and characteristic model.Beyond this,it also examines the pre-and post-formation return standard deviations of the portfolios,and whether the momentum and liquidity are the important predictors of stock returns or not in this thesis.It finds that the cross-sectional variation in stock returns is mainly determined by risk factors,rather than characteristics.Section five concludes the characteristics of asset pricing in China and proposes corresponding discussion. Key words:Book-to-Market;SIZE;Three-Factor Model;Characteristic Model. -1-- 1 - ABSTRACT Asset pricing theory is one of the key contents of financial theory. More than 4 decades before, the capital asset pricing model (CAPM) of William Sharp (1964) and John Lintner (1965) marks the birth of asset pricing theory. From then on, it draws great attraction and is still widely used in applications until now. With the development of asset pricing theory, unfortunately, the empirical record of Sharp-Lintner CAPM is poor. Evidence mounts that much of the variation in expected return is unrelated to market beta while related to firm characteristic which we called it anomaly. So many researches on how to improve CAPM and try to explain the stock average returns especially anomaly from various aspects, such as rational asset-pricing stories and irrational asset-pricing stories. Among those, three-factor model and characteristic model is the prominent representation. China established two securities exchanges in the early 1990s, the Shanghai Stock Exchange in December 1990 and the Shenzhen Stock Exchange in July 1991. These markets have since expanded very rapidly. With the increasing of the number of listed firms, research of asset pricing are widely used in applications concentrated on China Stock Market. Based on the sampling A-share listed firms from the Shanghai and Shenzhen Stock Markets for the period from January 1995 to June 2006, this thesis sort portfolios, examine the book-to-market equity effect, size effect, and compare three asset pricing models-CAPM, three-factor model and characteristic model. This thesis is organized into five sections. Section one covers a brief literature review of asset pricing and anomaly. It mainly introduces the birth of asset pricing theory and the study contents in different period at home and abroad, including the conclusions of empirical analyses. Section two introduces the test methods of CAPM, book-to-market, size anomaly, especially the definition of variables and test standards which are used in this article. Section three empirically analyzes the book-to-market effect, size effect, and CAPM. Empirical results suggest that the three-factor model is better than CAPM in China. Section four empirically analyzes the three-factor model and characteristic model. Beyond this, it also examines the pre- and post-formation return standard deviations of the portfolios, and whether the momentum and liquidity are the important predictors of stock returns or not in this thesis. It finds that the cross-sectional variation in stock returns is mainly determined by risk factors, rather than characteristics. Section five concludes the characteristics of asset pricing in China and proposes corresponding discussion. Key words: Book-to-Market; SIZE; Three-Factor Model; Characteristic Model