China’s equity markets, the second largest in the world, have long confounded Western investors. Outside observers paint China’s stock markets as a casino, where picking stocks requires as much skill as roulette, and investors avoid the country in their portfolio allocations. Patterns exist, however, if you know where to look.
In their paper, “On the predictability of Chinese stock returns” Chen, Kim, Yao, and Yu – a collaboration of finance professors from American and Chinese universities – examined 18 firm-specific variables known to predict stock returns in the US and their accuracy in predicting stock returns in China. The authors note that their study fills the gap in a Chinese asset pricing literature that focuses only on “a small set of predictive variables.”
Extending their study, I analyzed the predictive power of a list of over 400 factors, the largest single-factor study of China’s stock markets.
Contents
Predicting Chinese Stock Returns............................................1
Introduction...............................................................................3
Factor Summary........................................................................4
Intuitions about China’s Stock Markets......................................7
A Detailed Look at Momentum..................................................11
Overview...................................................................................11
Coverage...................................................................................12
Transaction Costs....................................................................13
Correlations...............................................................................13
Liquidity and Short Sale Constraints.....................................15
Liquidity......................................................................................15
Short Sale Constraints..............................................................16
Conclusion..................................................................................18
Appendix.....................................................................................19
Complete Decile Returns..........................................................19