Factor Momentum in the Chinese Stock Market

Based on 10 commonly used non-momentum factors, we construct a novel factor momentum strategy and find that it earns an annualized return of 9.91% and a Sharpe ratio of 1.15 in the Chinese stock market, which lacks stock-level momentum. We also find that factor momentum has strong explanatory power in subsuming industry momentum and digesting its component factors and a variety of anomalies. Further, mispricing correction helps explain factor momentum, which produces stronger returns during higher aggregate idiosyncratic volatility and lower investor sentiment periods as well as among stocks with higher information asymmetry and short-sale constraints. The exposure to factor premiums and a manifestation of predictability determine factor momentum in China.