More Powerful Tests for Anomalies in the China A-Share Market

Abstract

Research into asset pricing anomalies in the China A-share market is hampered given the short time series of available returns. Even when average excess returns on candidate factor portfolios are economically sizeable, conventional portfolio sorting methods lack statistical power. We apply an efficient sorting procedure that combines firm characteristics with the covariance matrix. For the China A-share market, we find that the efficient sorting procedure doubles the t-statistics compared to conventional portfolio sorts, leading to nine instead of three significant anomalies over the post-reform period from 2008 to 2020. We find significant size, value, low-risk, and returns-based anomalies. While portfolio characteristics differ between sorting methods, we find that efficient sorting portfolios highly correlate with equally weighted portfolios and capture the same underlying anomaly.

Keywords: Alpha, Anomalies, Asset Management, China, Investing, Portfolio Choice, Stock Market

JEL Classification: C58, G10, G11, G12, G15, G23, G40