Follow the Smart Money: Factor Forecasting in China

43 Pages Posted: 20 Jul 2020

See all articles by Qinhua Chen

Qinhua Chen

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Yeguang Chi

Shanghai Jiaotong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Xiao Qiao

School of Data Science, City University of Hong Kong; Paraconic Technologies US Inc.

Date Written: December 27, 2019

Abstract

We present novel evidence of factor timing in the Chinese stock market. Actively managed Chinese stock mutual funds have larger exposure on the size factor when it performs well and smaller exposure when it performs poorly. By constructing a proxy for the size preference of active stock funds, we can forecast size factor returns in the subsequent periods. A one-standard deviation increase in the size factor loading of active stock funds is associated with an increase in the size factor return of 1.18% in the next month and 10.8% in the next year. The result is not driven by industry rotation, price impact of mutual funds, or factor momentum. Actively managed stock mutual funds do not appear to time value or momentum factors.

Keywords: factor timing, return forecasting, mutual funds, emerging markets

JEL Classification: G10, G11

Suggested Citation

Chen, Qinhua and Chi, Yeguang and Qiao, Xiao, Follow the Smart Money: Factor Forecasting in China (December 27, 2019). Available at SSRN: https://ssrn.com/abstract=3636530 or http://dx.doi.org/10.2139/ssrn.3636530

Qinhua Chen

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Yeguang Chi

Shanghai Jiaotong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

HOME PAGE: http://www.saif.sjtu.edu.cn/en/professors/8498

Xiao Qiao (Contact Author)

School of Data Science, City University of Hong Kong ( email )

Hong Kong

Paraconic Technologies US Inc. ( email )

New York, NY
United States

HOME PAGE: http://sites.google.com/site/xiaoqiao10/

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