Is there more to asset price linkages in China than meets the eye: Cross-asset momentum and the role of hybrid funds

Abstract

Within publicly offered funds, hybrid funds combining stocks and bonds offer investors returns while mitigating risks through capital flows between these markets. Our study, analyzing China's financial market data from 2006 to 2022, uncovers a cross-asset momentum relationship between stocks and bonds. Portfolios leveraging cross-asset momentum demonstrate excess returns unexplained by other asset pricing factors. Our analysis highlights the intermediary role of hybrid funds in this cross-asset momentum transmission mechanism. Funds with more flexible asset allocation ratios play a more crucial intermediary role. These insights hold significant implications for investors aiming to optimize asset allocation across diverse markets and for policymakers aiming to bolster China's financial market efficiency.