Do IPO Portfolios Improve the Investment Opportunity Set? Evidence from Chinese A-share Market

This paper aims to examine whether the mean-variance frontier generated by benchmark portfolios can be expanded by adding all sorts of IPO portfolios, thus the investors can get improvement in investment opportunity sets. To form the benchmark portfolios, firstly, we investigate the factors which capture the cross-sectional variation in average monthly stock returns on Chinese main board A-share market from 1999 to 2010, and the result shows that BE/ME (book-to-market equity) and liquidity have the most significant power to explain the stock returns by using univariate sorting test, univariate and multivariate cross-sectional regressions methods. Then using spanning and step-down procedure, we come to some significant conclusions: in the short run, industrial IPO portfolios of medicine industry can significantly expand the mean-variance frontier; in the long run, industrial IPO portfolios with rag trade, transportation industry, metal industry and all stocks have the ability to improve the investment opportunity sets for mean-variance investors. The outcome has a vital implication for both financial institutions and investors.