Southbound capital flows and stock return predictability

Tian Ding, Wenjing Song, Jiangze Bian and Ge Zhang

Pacific-Basin Finance Journal, 2025, vol. 93, issue C

Abstract: This paper examines the impact of southbound cross-border capital flows on stock returns in the Hong Kong stock market. The study finds that southbound capital flows can significantly predict short-term returns on Hong Kong stocks. After adjusting for the Fama-French five-factor model, a weekly rebalancing long-short portfolio can achieve an annualized return of up to 25.84 %. This result remains robust in both predictive panel regression and Fama-MacBeth regression. Further mechanism tests indicate that the predictive power of southbound capital flows is primarily driven by demand shocks.

Keywords: Shanghai - Hong Kong stock connect; Southbound capital flows; Cross-border capital flows; Holding ratio (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25002240

DOI: 10.1016/j.pacfin.2025.102887

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