The Case for Factor Investing in China A

Abstract

The Chinese A share market has attracted a great deal of interest from global investors in recent years due to its size and increased importance to the global financial market. The A share market has unique market characteristics and regulatory environment that makes it challenging for institutional investors. Our paper examined the efficacies of factor strategies by applying well-known equity factors in China A. The paper demonstrated that traditional factor strategies, with proper design, could deliver attractive risk adjusted return relative to the cap-weighted benchmark. We also found that some characteristics of Chinese stock market had pronounced influences on factor performances and complicated factor strategy design. Notably, traditional price momentum factor did not work in China A. Instead, a sentiment factor based on return reversal and analyst information can better capture behavioral patterns of local investors. In addition to our empirical study, we also looked into a large body of academic researches for economic and behavioral explanations of factor anomalies. Our findings provided strong support for factor based investment strategies in Chinese A shares.