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).
Return predictability, Industries, Size, Book-to-market, Rational asset pricing, Information-ﬂow frictions
Asian Studies | Finance and Financial Management | Portfolio and Security Analysis
China International Conference in Finance, 4-7 July 2010, Beijing, China; Chinese Finance Association Annual Conference, 30 October 2010
City or Country
JIANG, Fuwei; RAPACH, David E.; STRAUSS, Jack K.; and TU, Jun.
How Predictable Is the Chinese Stock Market?. (2010). China International Conference in Finance, 4-7 July 2010, Beijing, China; Chinese Finance Association Annual Conference, 30 October 2010. 1-41. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/3192
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