Abstract: An empirical analysis based on sample data of all A stocks listed on Shanghai and Shenzhen Exchanges from June 1995 to December 2005 found that,Fama French three-factor model could not explain perfectly Chinese portfolio returns during new sample period. In order to explain perfectly Chinese portfolio returns based on modern finance theory,an improvement of unconditional FF three-factor model was completed by means of state switch informations, and the improved conditional pricing model of state switch was empirically found to explain perfectly Chinese portfolio returns. A conclusion was followed that conditional pricing model of state switch is better than unconditional FF three-factor model while explaining portfolio returns.

Key words: state switch informations, unconditional FF three factor model, conditional pricing model