 Taming the factor zoo in China’s equity market: A Bayesian approachJie Mao, Xiaobao Xia and Haotian Zhuo Pacific-Basin Finance Journal, 2025, vol. 93, issue C Abstract: This paper proposes an advanced Bayesian Model Averaging (BMA) framework to estimate the stochastic discount factor (SDF) in the Chinese stock market, addressing model uncertainty across 288 quadrillion factor combinations. By integrating the Moore–Penrose pseudoinverse and LDL decomposition, our methodology ensures sparsity, numerical stability, and robustness for high-dimensional, volatile datasets. We find that (i) the idiosyncratic volatility (STD) factor dominates with 60 percent posterior model probability, likely driven by retail investor herding and regulatory inefficiencies; (ii) the size factor (SMB) reflects distortions from state-owned enterprise (SOEs); (iii) the optimized BMA-SDF outperforms benchmark models in both in-sample and out-of-sample tests; (iv) no single model consistently excels across cross-sectional and time-series dimensions; and (v) the SDF relies on a dense set of observable factors. These findings highlight BMA’s efficacy in emerging markets and underscore the need for reforms to enhance transparency, reduce volatility, and optimize SOE performance. Keywords: Factor zoo; Bayesian model averaging; China’s equity market (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x2500229x DOI: 10.1016/j.pacfin.2025.102892 Access Statistics for this article Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee More articles in Pacific-Basin Finance Journal from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.