Trend Factor in China

59 Pages Posted: 13 Jun 2019 Last revised: 24 Sep 2019

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: September 23, 2019

Abstract

We propose a 4-factor model by adding an additional trend factor to Liu, Stambaugh and Yuan’s (2019; LSY-3) 3-factor model: market, size and value. Since individual investors contribute about 80% of the trading volume in China, the trend factor captures well the resulting important price and volume trends, and has a monthly Sharpe ratio of 0.48, much greater than those of the market (0.11), size (0.19) and value (0.28). The proposed 4-factor model explains all reported Chinese anomalies, including turnover and reversal that are unexplained previously by LSY-3. Moreover, the model explains well mutual fund returns, working as an analogue of Carhart (1997) 4-factor model in China. It also strongly outperforms the replication of Fama-French (2015) 5-factor model and Hou, Xue and Zhang (2015) q-factor model in terms of explanatory power.

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 (September 23, 2019). 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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