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Which is the better fourth factor in China? Reversal or turnover?

Hung-Wen Lin, Jing-Bo Huang, Kun-Ben Lin, Joyce Zhang and Shu-Heng Chen

Pacific-Basin Finance Journal, 2020, vol. 62, issue C

Abstract: We conduct contests between the reversal factor and turnover factor in explaining excess returns, return spreads and negative momentum profits in the Chinese stock market. Our findings indicate that the reversal factor does a better job than the turnover factor in explaining return spreads and negative momentum profits from both the cross-section and time-series perspectives. In addition, the reversal factor is better than the turnover factor when discussing excess returns from the cross-section perspective. By contrast, regardless of whether the time-series turnover factor or the cross-section turnover factor is considered, they are both characterized by insignificant slopes in a factor model facing return spreads, which suggests that there are actually notable underlying shortcomings behind the turnover factor. Overall, our work implies that the reversal factor is a better fourth factor in the Chinese stock market.

Keywords: Asset pricing; Factor models; Price reversal; Cross-section factor (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.pacfin.2020.101347

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