Disciplining the factor zoo: Identifying pricing factors in the Chinese stock market

Despite a plethora of proposed market anomalies and risk factors, identifying truly impactful ones for China's stock market cross-sectional returns remains contentious. While existing literature focuses on mature markets, China as a major emerging market with distinct institutional features leaves factor validity unclear. Moving beyond merely finding anomalies, we employ double-selection LASSO under the framework of stochastic discount factor (SDF) to identify factors that carry independent and incremental information. Our findings show that most tested factors significantly explain cross-sectional returns, with corporate financials and market friction factors emerging as key sources of risk premia. Volatility-related factors demonstrate consistent explanatory power over time, and risk anomalies in the Chinese stock market do not disappear as in the U.S. market due to various barriers to arbitrage trading. These results highlight the limitations of parsimonious linear factor models and call for robust asset pricing frameworks and China-specific investment strategies.