Factor timing in the Chinese stock market

Abstract

I conduct an exploratory study about the feasibility of factor timing in the Chinese stock market, covering 24 representative and well-identified risk factors in 10 categories from the literature. The long–short portfolio of short-term reversal exhibits strong out-of-sample predictability, which is robust across various models and all types of predictors. This predictability is significant both statistically and economically, with a simple investment strategy obtaining its return three times higher than the buy-and-hold return in the sample period and a significant annualized 20.4% CH-3 alpha. Portfolio historical volatility and market volatility measurement predictors play crucial roles in the reversal factor premium's robust predictability. However, such results are not evident in predicting all other factors' long–short portfolios as well as all factors' long-wing and short-wing portfolios, and this failure cannot be attributed to their exposure to unpredictable market returns.