Are Trend Factor in China? Evidence from Investment Horizon Information

Abstract

This paper improves the expected return variable and the corresponding trend factor documented by Han, Zhou, and Zhu (2016) and reveals the incremental predictability of this novel expected return measure on stock returns in the Chinese stock market. Portfolio analyses and firm-level cross-sectional regressions indicate a significantly positive relation between the improved expected return and future returns. These results are robust to the short-, intermediate-, and long-term price trends and other derived expected returns. Our improved trend factor also outperforms all trend factors constructed by other expected returns. Additionally, we observe that lottery demand, capital states, return synchronicity, investor sentiment and information uncertainty can help explain the superior performance of the improved expected return measure in the Chinese stock market.

Keywords: Trends, Moving averages, Lagged returns, Predictability, Chinese Stock Market