Abstract
The apparent absence of a momentum effect in China’s equity markets is a controversial issue. This exploratory study controls for three risk factors in the well-known Fama-French model and examines momentum-sorted cross-sectional returns for China’s entire A shares market for the period 2005-2015. Our algorithm uncovers patterns of risk that reveal the momentum effect is not as weak as previous studies claim. Given the risk patterns extracted from our data, we construct two functional principal component common risk factors driven by momentum and disposition effects. We incorporate the revealed risk patterns into an eigenfunction portfolio that significantly outperforms conventional portfolio strategies.
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