IDEAS home Printed from https://ideas.repec.org/a/bla/pacecr/v27y2022i2p194-220.html
   My bibliography  Save this article

Return predictability between industries and the stock market in China

Author

Listed:
  • Yanying Zhang
  • Yiuman Tse
  • Gaiyan Zhang

Abstract

We examined the lead–lag relationship between industry portfolio returns and market returns in China, the largest emerging market, for the period 1993–2019. Using a bidirectional pairwise regression model, we found that the returns for banking and real estate not only predict market returns and returns for other industries but also predict industrial output growth. Since 2005, a shift in predictive ability from manufacturing to real estate has occurred, whereas banking has maintained consistent predictive power over the examined period. In the reverse direction, the stock market predicts the returns for mining and transportation. The predictive power of banking was amplified during the 2008 financial crisis; however, it decreased in 2015 due to turbulence in China's stock market. The market predictability of mining was enhanced in both periods. The in‐sample and out‐of‐sample tests suggest that certain industry predictability patterns remain to be exploited by China's stock market participants.

Suggested Citation

  • Yanying Zhang & Yiuman Tse & Gaiyan Zhang, 2022. "Return predictability between industries and the stock market in China," Pacific Economic Review, Wiley Blackwell, vol. 27(2), pages 194-220, May.
    • Handle: RePEc:bla:pacecr:v:27:y:2022:i:2:p:194-220
    DOI: 10.1111/1468-0106.12379
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1468-0106.12379
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1468-0106.12379?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Lo, Andrew W. & Craig MacKinlay, A., 1990. "An econometric analysis of nonsynchronous trading," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 181-211.
    2. Chong, Terence Tai-Leung & Lam, Tau-Hing & Yan, Isabel Kit-Ming, 2012. "Is the Chinese stock market really inefficient?," China Economic Review, Elsevier, vol. 23(1), pages 122-137.
    3. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    4. Kewei Hou, 2007. "Industry Information Diffusion and the Lead-lag Effect in Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1113-1138.
    5. Harrison Hong & Terence Lim & Jeremy C. Stein, 2000. "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Journal of Finance, American Finance Association, vol. 55(1), pages 265-295, February.
    6. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    7. Xin Wang & Yi Wen, 2019. "Macroeconomic effects of government spending in China," Pacific Economic Review, Wiley Blackwell, vol. 24(3), pages 416-446, August.
    8. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    9. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    10. Jeannine Bailliu & Mark Kruger & Argyn Toktamyssov & Wheaton Welbourn, 2019. "How fast can China grow? The Middle Kingdom's prospects to 2030," Pacific Economic Review, Wiley Blackwell, vol. 24(2), pages 373-399, May.
    11. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.
    12. Hongyi Chen & Andrew Tsang, 2020. "Impact of US monetary policy rate shock and other external shocks on the Hong Kong economy: A factor‐augmented vector autoregression approach," Pacific Economic Review, Wiley Blackwell, vol. 25(1), pages 3-20, February.
    13. Wu, Qiongbing & Shamsuddin, Abul, 2014. "Investor attention, information diffusion and industry returns," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 30-43.
    14. Bahrami, Afsaneh & Shamsuddin, Abul & Uylangco, Katherine, 2019. "Are advanced emerging market stock returns predictable? A regime-switching forecast combination approach," Pacific-Basin Finance Journal, Elsevier, vol. 55(C), pages 142-160.
    15. Lee, Chien-Chiang & Chen, Mei-Ping & Chang, Chi-Hung, 2013. "Dynamic relationships between industry returns and stock market returns," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 119-144.
    16. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
    17. Laopodis, Nikiforos T., 2016. "Industry returns, market returns and economic fundamentals: Evidence for the United States," Economic Modelling, Elsevier, vol. 53(C), pages 89-106.
    18. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, vol. 105(1), pages 85-110, November.
    19. Shefrin, Hersh & Statman, Meir, 1985. "The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
    20. Tessitore, Anthony & Usmen, Nilufer, 2005. "Relative importance of industry and country factors in security returns," Global Finance Journal, Elsevier, vol. 16(1), pages 16-25, August.
    21. Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 1-47, February.
    22. Yongheng Deng & Eric Girardin & Roselyne Joyeux & Shuping Shi, 2017. "Did bubbles migrate from the stock to the housing market in China between 2005 and 2010?," Pacific Economic Review, Wiley Blackwell, vol. 22(3), pages 276-292, August.
    23. Chien-Chih Lin, 2015. "Asia-Pacific Stock Return Predictability and Market Information Flows," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(3), pages 658-671, May.
    24. Benjamin Golez, 2014. "Expected Returns and Dividend Growth Rates Implied by Derivative Markets," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 790-822.
    25. Tobias J. Moskowitz & Mark Grinblatt, 1999. "Do Industries Explain Momentum?," Journal of Finance, American Finance Association, vol. 54(4), pages 1249-1290, August.
    26. Hong, Hui & Chen, Naiwei & O’Brien, Fergal & Ryan, James, 2018. "Stock return predictability and model instability: Evidence from mainland China and Hong Kong," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 132-142.
    27. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    28. Lauren Cohen & Andrea Frazzini, 2008. "Economic Links and Predictable Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1977-2011, August.
    29. Bruce N. Lehmann, 1990. "Fads, Martingales, and Market Efficiency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 1-28.
    30. Michael Gofman & Gill Segal & Youchang Wu & Stijn Van Nieuwerburgh, 2020. "Production Networks and Stock Returns: The Role of Vertical Creative Destruction," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5856-5905.
    31. Goh, Jeremy C. & Jiang, Fuwei & Tu, Jun & Wang, Yuchen, 2013. "Can US economic variables predict the Chinese stock market?," Pacific-Basin Finance Journal, Elsevier, vol. 22(C), pages 69-87.
    32. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "The Size and Incidence of the Losses from Noise Trading," Journal of Finance, American Finance Association, vol. 44(3), pages 681-696, July.
    33. Lin, Mei-Chen & Wu, Chu-Hua & Chiang, Ming-Ti, 2014. "Investor attention and information diffusion from analyst coverage," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 235-246.
    34. Chen, Jian & Jiang, Fuwei & Liu, Yangshu & Tu, Jun, 2017. "International volatility risk and Chinese stock return predictability," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 183-203.
    35. Haiqiang Chen & Qian Han & Yingxing Li & Kai Wu, 2013. "Does Index Futures Trading Reduce Volatility in the Chinese Stock Market? A Panel Data Evaluation Approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(12), pages 1167-1190, December.
    36. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
    37. Carpenter, Jennifer N. & Lu, Fangzhou & Whitelaw, Robert F., 2021. "The real value of China’s stock market," Journal of Financial Economics, Elsevier, vol. 139(3), pages 679-696.
    38. Eyssell, Thomas & Fung, Hung-Gay & Zhang, Gaiyan, 2013. "Determinants and price discovery of China sovereign credit default swaps," China Economic Review, Elsevier, vol. 24(C), pages 1-15.
    39. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
    40. Brennan, Michael J & Jegadeesh, Narasimhan & Swaminathan, Bhaskaran, 1993. "Investment Analysis and the Adjustment of Stock Prices to Common Information," The Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 799-824.
    41. Seema Narayan, 2015. "Are Asian Stock Market Returns Predictable?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(5), pages 867-878, September.
    42. Tse, Yiuman, 2015. "Do industries lead stock markets? A reexamination," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 195-203.
    43. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    44. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2013. "International Stock Return Predictability: What Is the Role of the United States?," Journal of Finance, American Finance Association, vol. 68(4), pages 1633-1662, August.
    45. repec:wyi:journl:002169 is not listed on IDEAS
    46. Dongwei Su, 2011. "An Empirical Analysis of Industry Momentum in Chinese Stock Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(4), pages 4-27, July.
    47. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    48. Wang, Chaug-Jung & Lee, Chien-Hui & Huang, Bwo-Nung, 2003. "An analysis of industry and country effects in global stock returns: evidence from Asian countries and the U.S," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 560-577.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yiuman Tse, 2018. "Return predictability and contrarian profits of international index futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(7), pages 788-803, July.
    2. Leland E. Farmer & Lawrence Schmidt & Allan Timmermann, 2023. "Pockets of Predictability," Journal of Finance, American Finance Association, vol. 78(3), pages 1279-1341, June.
    3. Rapach, David & Zhou, Guofu, 2013. "Forecasting Stock Returns," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 328-383, Elsevier.
    4. Rapach, David E. & Ringgenberg, Matthew C. & Zhou, Guofu, 2016. "Short interest and aggregate stock returns," Journal of Financial Economics, Elsevier, vol. 121(1), pages 46-65.
    5. Yu, Miao & Hu, Xiaolu & Zhong, Angel, 2023. "Trade links and return predictability: The Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    6. Christopher J. Neely & David E. Rapach & Jun Tu & Guofu Zhou, 2014. "Forecasting the Equity Risk Premium: The Role of Technical Indicators," Management Science, INFORMS, vol. 60(7), pages 1772-1791, July.
    7. Bannigidadmath, Deepa & Narayan, Paresh Kumar, 2016. "Stock return predictability and determinants of predictability and profits," Emerging Markets Review, Elsevier, vol. 26(C), pages 153-173.
    8. Victor Troster & José Penalva & Abderrahim Taamouti & Dominik Wied, 2021. "Cointegration, information transmission, and the lead‐lag effect between industry portfolios and the stock market," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(7), pages 1291-1309, November.
    9. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    10. Laopodis, Nikiforos T., 2016. "Industry returns, market returns and economic fundamentals: Evidence for the United States," Economic Modelling, Elsevier, vol. 53(C), pages 89-106.
    11. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    12. Ellington, Michael & Stamatogiannis, Michalis P. & Zheng, Yawen, 2022. "A study of cross-industry return predictability in the Chinese stock market," International Review of Financial Analysis, Elsevier, vol. 83(C).
    13. Xi Dong & Yan Li & David E. Rapach & Guofu Zhou, 2022. "Anomalies and the Expected Market Return," Journal of Finance, American Finance Association, vol. 77(1), pages 639-681, February.
    14. Narongdech Thakerngkiat & Hung T. Nguyen & Nhut H. Nguyen & Nuttawat Visaltanachoti, 2021. "Do accounting information and market environment matter for cross‐asset predictability?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4389-4434, September.
    15. Sharifkhani, Ali & Simutin, Mikhail, 2021. "Feedback loops in industry trade networks and the term structure of momentum profits," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1171-1187.
    16. Phan, Dinh Hoang Bach & Sharma, Susan Sunila & Narayan, Paresh Kumar, 2015. "Stock return forecasting: Some new evidence," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 38-51.
    17. Mengxi He & Yudong Wang & Yaojie Zhang, 2023. "The predictability of iron ore futures prices: A product‐material lead–lag effect," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(9), pages 1289-1304, September.
    18. Song, Ziyu & Yu, Changrui, 2022. "Investor sentiment indices based on k-step PLS algorithm: A group of powerful predictors of stock market returns," International Review of Financial Analysis, Elsevier, vol. 83(C).
    19. Li, Yan & Ng, David T. & Swaminathan, Bhaskaran, 2013. "Predicting market returns using aggregate implied cost of capital," Journal of Financial Economics, Elsevier, vol. 110(2), pages 419-436.
    20. Hong, Harrison & Torous, Walter & Valkanov, Rossen, 2007. "Do industries lead stock markets?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 367-396, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:pacecr:v:27:y:2022:i:2:p:194-220. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1361-374X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.