Mitigating Shell Value Contamination in China’s A-Share Market: A Two-Factor Strategy Combining Size and Earnings-to-Price Effects

Xinyi He ()
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Xinyi He: Central University of Finance and Economics

A chapter in Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025), 2025, pp 533-543 from Springer

Abstract: Abstract This study investigates the joint explanatory power of size (ME) and value (EP) factors in China’s A-share market from 2000 to 2024. Addressing structural idiosyncrasies such as shell value contamination, we propose a two-factor strategy that excludes the smallest 4% of stocks and constructs portfolios via ME-EP decile sorting. Empirical results show that the EP+ME portfolio generates an annualised return of 4.17% with a Sharpe ratio of 0.17, outperforming single-factor and alternative multifactor models. The strategy demonstrates resilience across market regimes but remains sensitive to macroeconomic shocks, as evidenced by drawdowns during the 2008 crisis and post-2019 geopolitical tensions. Correlation analysis reveals strong alignment with the CSI 500 index (ρ=0.36), highlighting mid-cap exposure as a key driver. Methodological refinements enhance robustness, including dynamic exclusion thresholds and survivorship bias mitigation. These findings contribute to emerging market asset pricing literature and offer practical insights for institutional investors navigating China’s evolving equity landscape.

Keywords: Factor Investing; Size Effect; Value Effect; Chinese A-Share Market; Risk-Adjusted Returns (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-811-0_56

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DOI: 10.2991/978-94-6463-811-0_56

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