Asset Allocation in Chinese Stock Market: The Role of Return Predictability

Posted: 20 May 2019

See all articles by Jian Chen

Jian Chen

Xiamen University - School of Economics

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Date Written: May 4, 2014

Abstract

While numerous studies have analyzed the asset allocation issue of US stock market from various angles, much less attention has been paid to the asset allocation issue of Chinese stock market. This article investigates the asset allocation in Chinese stock market from a perspective of incorporating return predictability. We find significant out-of-sample return predictability in Chinese stock market based on a host of return predictors. We then examine the performance of active portfolio strategies such as aggregate market timing strategy, and industry, size, and value rotation strategies to profitably exploit return predictability. We provide strong evidence that these portfolio strategies incorporating return predictability can deliver superior outperformance up to 600 basis points per annum and almost double the Sharpe ratios compared to the passive buy-and-hold benchmarks ignoring return predictability.

Keywords: Chinese Stock Market, Asset Allocation, Return Predictability, Combination Forecast

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Chen, Jian and Jiang, Fuwei and Tu, Jun, Asset Allocation in Chinese Stock Market: The Role of Return Predictability (May 4, 2014). Journal of Portfolio Management, 2015, Vol. 41, No. 5, 71-83 . Available at SSRN: https://ssrn.com/abstract=2774692

Jian Chen (Contact Author)

Xiamen University - School of Economics ( email )

422 Siming Nan Road
Xiamen, Fujian 361005
China

Fuwei Jiang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Jun Tu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

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