Publication Type

Conference Paper

Version

acceptedVersion

Publication Date

7-2010

Abstract

We analyze return predictability for the Chinese stock market, including the aggregate market portfolio and the components of the aggregate market, such as portfolios sorted on industry, size, book-to-market and ownership concentration. Considering a variety of economic variables as predictors, both in-sample and out-of-sample tests highlight significant predictability in the aggregate market portfolio of the Chinese stock market and substantial differences in return predictability across components. Among industry portfolios, Finance and insurance, Real estate, and Service exhibit the most predictability, while portfolios of small-cap and low ownership concentration firms also display considerable predictability. Two key findings provide economic explanations for component predictability: (i) based on a novel out-of-sample decomposition, time-varying macroeconomic risk premiums captured by the conditional CAPM model largely account for component predictability; (ii) industry concentration and market capitalization significantly explain differences in return predictability across industries, consistent with the information-flow frictions emphasized by Hong, Torous, and Valkanov (2007).

Keywords

Return predictability, Industries, Size, Book-to-market, Rational asset pricing, Information-flow frictions

Discipline

Asian Studies | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

China International Conference in Finance, 4-7 July 2010, Beijing, China; Chinese Finance Association Annual Conference, 30 October 2010

First Page

1

Last Page

41

City or Country

New York

Additional URL

https://www.ccfr.org.cn/cicf2010/papers/20091215182251.pdf

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