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Southbound capital flows and stock return predictability

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  • Ding, Tian
  • Song, Wenjing
  • Bian, Jiangze
  • Zhang, Ge

Abstract

This paper examines the impact of southbound cross-border capital flows on stock returns in the Hong Kong stock market. The study finds that southbound capital flows can significantly predict short-term returns on Hong Kong stocks. After adjusting for the Fama-French five-factor model, a weekly rebalancing long-short portfolio can achieve an annualized return of up to 25.84 %. This result remains robust in both predictive panel regression and Fama-MacBeth regression. Further mechanism tests indicate that the predictive power of southbound capital flows is primarily driven by demand shocks.

Suggested Citation

  • Ding, Tian & Song, Wenjing & Bian, Jiangze & Zhang, Ge, 2025. "Southbound capital flows and stock return predictability," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25002240
    DOI: 10.1016/j.pacfin.2025.102887
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