Factor model and momentum in China A-share market

 The prevalent Fama-French three-factor model can well describe stock returns in major equity markets with the exception of China. Replacing book-to-market ratio with price-to-earnings ratio successfully solves the problem. Abnormal trading volume contains incremental explanatory power for expected returns and constitutes an extra speculative factor. Overall, these findings support that the Fama-French three-factor model is portable, adjustable, and accommodative of new factors.

Existing research does not find significant momentum profits in many emerging markets including China. We propose an alternative momentum strategy which groups stocks into return intervals rather than percentiles. We apply the method to the China A-share market and find economically significant momentum profits in weekly returns, but not in monthly returns. The weekly momentum lasts for about 1 year. More than half of the profit is realized in the first 3 weeks. We apply the method to other Asian equity markets and find significant weekly momentum in Hong Kong, Taiwan, Korea, Thailand, and Indonesia. These findings suggest that momentum may exist in different formats in different markets. Existence of momentum in a closed equity market like China supports momentum is pervasive in short-term stock returns.