Trend Factor in China

39 Pages Posted: 13 Jun 2019 Last revised: 19 Feb 2020

See all articles by Yang Liu

Yang Liu

Tsinghua University - School of Economics & Management

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: Feb 18, 2020

Abstract

We propose a 4-factor model for the Chinese stock market by adding a trend factor to Liu, Stambaugh, and Yuan’s (2019) 3-factor model, which consists of the market, size, and value. Ac-counting for the fact that individual investors contribute about 80% of the total trading volume, the trend factor captures salient relevant price and volume trends, and earns a monthly Sharpe ratio of 0.48 – much greater than that of the market (0.11), size (0.20), and value (0.28). Our 4-factor model explains all reported Chinese anomalies – including turnover and reversal – that are difficult to explain by existing models. Our model also outperforms strongly the replication of Fama and French’s (2015) 5-factor model and Hou, Xue, and Zhang’s (2015) 4-factor model in terms of both the Sharpe ratio and explanatory power. Moreover, our model can also explain mutual fund returns, working as an analogue of Carhart’s (1997) 4-factor model in China.

Keywords: China Stocks, Trends, Predictability, Factor Model, Anomalies

JEL Classification: G12, G14, G15

Suggested Citation

Liu, Yang and Zhou, Guofu and Zhu, Yingzi, Trend Factor in China (Feb 18, 2020). Available at SSRN: https://ssrn.com/abstract=3402038 or http://dx.doi.org/10.2139/ssrn.3402038

Yang Liu (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing
China

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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