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

Zhiyong Li, Yifan Wan, Tianyi Wang () and Mei Yu

Journal of International Financial Markets, Institutions and Money, 2023, vol. 85, issue C

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.

Keywords: Economic policy uncertainty; Size premium; Factor timing (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:85:y:2023:i:c:s1042443123000501

DOI: 10.1016/j.intfin.2023.101782

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