Factor Timing in the Chinese Stock Market

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 ten categories from the literature. The long-short portfolio of short-term reversal exhibits strong and statistically significant out-of-sample predictability, which is robust across various models and all types of predictors. However, such results are not evident in the prediction of all other factors’ long-short portfolios, as well as all factors’ long-wing and short-wing portfolios. The high exposure to the market beta, together with the unpredictability of the market return, explains these failures to some degree. On the other hand, a simple investment strategy based on predicted returns of the reversal factor’s long-short portfolio obtains a significant return three times higher than the simple buy-and-hold strategy in the sample period, with a significant annualized 20.4% CH-3 alpha.