The strategy focuses on China A-Share stocks, using factors like Book-to-Market, Short-term reversal, and Idiosyncratic volatility to identify overreactions. It goes long high-ranking stocks and short low-ranking ones.
ASSET CLASS: stocks | REGION: China | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Stock
I. STRATEGY IN A NUTSHELL
China A-Share stocks are scored for overreaction using Book-to-Market, short-term reversal, idiosyncratic volatility, MAX, and abnormal turnover. Long top decile, short bottom decile, value-weighted, monthly rebalanced.
II. ECONOMIC RATIONALE
Retail investor dominance leads to overreaction and mispricing in A-shares. The strategy profits from eventual corrections as overpriced stocks revert to fair value.
III. SOURCE PAPER
A Composite Four-Factor Model in China [Click to Open PDF]
Xiangbin Lian, Shenzhen China-Europe Rabbit Fund Management Co., Ltd; Chuan Shi, Beijing Liangxin Investment Management Co. Ltd
<Abstract>
We investigate investors’ overreaction and underreaction and their implications to asset pricing in China stock market. The study first picks anomaly variables representing investors’ overreaction and underreaction and then measures these two effects quantitatively. Both of them deliver significant excess returns, both statistically and economically, in China stock market. We then equip these two effects with the market and the size factor to construct a composite four-factor model and study how they price other assets. Extensive empirical analysis shows that this new model is suitable for China stock market. The maximum annual Sharpe ratio spanned by the four factors is 2.02, which is one time higher than those spanned by similar models such as Stambaugh and Yuan (2017) and Daniel, Hirshleifer and Sun (2020). In addition, using 149 anomaly candidates as test assets, the composite four-factor model exhibit good pricing capability, as there is only one test asset whose abnormal return given the model exceeds the 3.0 t-statistic threshold.
IV. BACKTEST PERFORMANCE
| Annualised Return | 15.94% |
| Volatility | 21.3% |
| Beta | N/A |
| Sharpe Ratio | 0.75 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
