FINTECH THRUST SEMINAR | Replicating and Digesting Anomalies in the Chinese A-share Market
Replicating and Digesting Anomalies in the Chinese A-share Market
Abstract:
We replicate 469 anomaly variables similar to those studied by Hou, Xue, and Zhang (2020) using Chinese A-share data and a reliable testing procedure with mainboard breakpoints and value-weighted returns. We find that 83.37% of the anomaly variables do not generate significant high-minus-low quintile raw return spreads. Further adjusting risk increases the failure rate slightly to 84.22% based on CAPM alphas and 86.99% based on Fama–French 3-factor alphas. We show that the conventional procedure using all A-share breakpoints with equal-weighted returns for the anomaly test is indeed problematic, as it assigns too much weight to microcaps and has a very limited investment capacity. The CH3-factor, CH4-factor, and q-factor models show the best performance over the whole sample period. The q-factor model is the best performer in the post-2007 subsample period, after significant improvements occurred in China’s financial market environment, such as the completion of the split-share structure reform and the implementation of new accounting standards conforming to the IFRS. The non-SOE subsample in the post-2007 period is a cleaner sample, in which the CH4-factor and q-factor models are the best performers.
Professor John Wei is currently Distinguished Research Professor at The Hong Kong Polytechnic University (PolyU). He joined PolyU in 2016 as Chair Professor of Financial Economics (2016-2022) and was Associate Dean (Research and Postgraduate Studies) from 2019-2022. He received his PhD in Finance from the University of Illinois, Champaign-Urbana. He previously taught at University of Mississippi, University of Miami, and Indiana University. Before joining PolyU, he served as Chair Professor of Finance at the Hong Kong University of Science and Technology (HKUST) and had worked there for 24 years. He previously served as Director of Value Partners Center for Investing and Director of the Center for Asian Financial Markets and Director of Master of Science (Financial Analysis)/(Investment Management) Programs at the HKUST for many years. He served as Acting Head in the Department of Finance at HKUST during the period of January 2000-August 2002, February-June 2003, and June 2015. Moreover, he assisted to develop wealth management and investment models for, among others, Hang Seng Bank Limited, HSBC Corporation Limited, and Fidelity Investments Management (Hong Kong) Limited. He served as an Independent Nonexecutive Director at Haitong International Securities Group Limited for more than eight years.
Professor Wei’s research interests are mainly in the areas of empirical asset pricing, behavioral finance, international finance, and corporate governance. He has published more than 80 articles in leading finance and accounting journals, including Journal of Finance, Journal of Financial Economics, The Accounting Review, Management Science, Journal of Financial and Quantitative Analysis, Contemporary Accounting Research (CAR), and Journal of Business, among others. He has also published several papers in the most prestigious practitioner journal, Financial Analysts Journal.
Professor Wei is best known for his extensive research on the cross-section of stock returns in the U.S. and international markets. He has won more than 37 conference best paper/research awards. Four of these papers have been cited by 2013 Economic Nobel Prize Laureate, Eugene Fama. Most of his papers are well cited. Many of his papers are associated with the foundation of those factors in the Fama and French (2015) five-factor model and the Hou, Xue, and Zhang (2015) q-factor model.