China A-Shares: Strategic Allocation to Market and Factor Premiums

Abstract

We investigate the added value of strategically allocating to the Chinese A-shares equity market. Our results indicate a positive contribution to a portfolio which only considers traditional developed and emerging equity markets and bonds. We find that a diversified A-shares portfolio based on value, quality, and momentum factors exhibits a significantly better risk-adjusted performance than the passive A-shares market portfolio. Consequently, allocating to Chinese A-share factor premiums significantly improves the efficient frontier. The conclusions remain similar when incorporating conservative estimates of trading costs or when constructing value-weighted portfolios, which represent more realistic investor returns.

Keywords: Alpha, China, A-shares, Factor investing, Investing, Momentum, Value

JEL Classification: F10, G10