Asset Allocation in the Chinese Stock Market: The Role of Return Predictability

In this article the authors investigate asset allocation in the Chinese stock market from the perspective of incorporating return predictability. Based on a host of return predictors, they find significant out-of-sample return predictability in the Chinese stock market. They then examine the performance of active portfolio strategies-such as aggregate market timing as well as industry, size, and value-rotation strategies-designed to profitably exploit return predictability. Strong evidence is found by the authors that these portfolio strategies incorporating return predictability can deliver superior performance-up to 600 basis points per annum and almost double the Sharpe ratios-compared with the passive buy-and-hold benchmarks that ignore return predictability.