Follow the Smart Money: Factor Forecasting in China
43 Pages Posted: 20 Jul 2020
Date Written: December 27, 2019
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
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