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Factor-timing in the Chinese factor zoo: The role of economic policy uncertainty

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  • Li, Zhiyong
  • Wan, Yifan
  • Wang, Tianyi
  • Yu, Mei

Abstract

In this study, we investigate the predictive power of economic policy uncertainty (EPU) on factor returns in the Chinese market. We find that EPU can significantly but negatively predict the size premium (i.e., small-minus-big returns) at short and long horizons. However, such results are not evident in the prediction of 15 other characteristic-related factor returns, including the market, momentum, value, profitability, investment, and a range of mispricing or risk factors. The results are robust to various control variables and out-of-sample tests. Evidence further confirms that EPU can contribute to factor timing, especially size timing, in stark contrast with the evidence found in the US market. Economically, the cash flow and flight-to-safety channels may account for the predictive power of EPU.

Suggested Citation

  • Li, Zhiyong & Wan, Yifan & Wang, Tianyi & Yu, Mei, 2023. "Factor-timing in the Chinese factor zoo: The role of economic policy uncertainty," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:intfin:v:85:y:2023:i:c:s1042443123000501
    DOI: 10.1016/j.intfin.2023.101782
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    More about this item

    Keywords

    Economic policy uncertainty; Size premium; Factor timing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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