Return predictability between industries and the stock market in China

Yanying Zhang, Yiuman Tse and Gaiyan Zhang

Pacific Economic Review, 2022, vol. 27, issue 2, 194-220

Abstract: We examined the lead–lag relationship between industry portfolio returns and market returns in China, the largest emerging market, for the period 1993–2019. Using a bidirectional pairwise regression model, we found that the returns for banking and real estate not only predict market returns and returns for other industries but also predict industrial output growth. Since 2005, a shift in predictive ability from manufacturing to real estate has occurred, whereas banking has maintained consistent predictive power over the examined period. In the reverse direction, the stock market predicts the returns for mining and transportation. The predictive power of banking was amplified during the 2008 financial crisis; however, it decreased in 2015 due to turbulence in China's stock market. The market predictability of mining was enhanced in both periods. The in‐sample and out‐of‐sample tests suggest that certain industry predictability patterns remain to be exploited by China's stock market participants.

Date: 2022
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