Q-theory, mispricing, and profitability premium: Evidence from China

2022

Accounting & Finance

Self Cite

This paper proposes a factor timing strategy with information from 146 characteristic‐based factors and a deep learning approach to capture the nonlinear predictability. The deep learning‐based factor timing strategy generates the highest economic value compared with the unconditional and alternative linear machine learning‐based portfolios and remains robust after controlling for traditional factor models and transaction costs. With the unique market structure of the Chinese stock market, we find that mispricing‐based theory helps explain the factor timing via deep learning.

Section: Introductionmentioning

confidence: 86%

Section: Methodsmentioning

confidence: 99%

mentioning

confidence: 91%

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Timing the factor zoo via deep learning: Evidence from China

Liao

2022

Accounting & Finance

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“…Profitability premium is widely studied in the asset pricing literature, as more profitable firms can generate higher future stock returns (Jiang et al, 2018; Novy‐Marx, 2013; Wahal, 2019). As it has the significant power in predicting returns, profitability has become an additional factor in the well‐known pricing models of both Fama and French (2015) and Hou et al (2015).…”

Section: Introductionmentioning

confidence: 99%

“…However, the underlying economic mechanism remains controversial. Limits to arbitrage (Lam & Wei, 2011; Shleifer & Vishny, 1997), limited attention (Corwin & Coughenour, 2008), valuation uncertainty (Lakonishok et al, 1994) and investor sentiment (Coulton et al, 2016; Huang et al, 2015; Jiang et al, 2019; Stambaugh et al, 2012; Sun et al, 2020) can be drivers of profitability premium in the stock market, whereas Hou et al (2015) and Jiang et al (2018) support risk‐based explanations. Therefore, whether the profitability premium is driven by behavioural mispricing or value investment is still worth exploring.…”

Section: Introductionmentioning

confidence: 99%

Financial openness and profitability premium: Causal evidence from the Shanghai‐Hong Kong Stock Connect

Jin

Zhang

2023

Accounting & Finance

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It takes two to tango: Fundamental timing in stock market

Tang

et al. 2020

Int. J Fin Econ

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In this paper, we propose a fundamental timing strategy in both U.S. and Chinese stock markets to timing the fundamentals sorted portfolios such as value and profitability portfolios in the time-series dimension. We find that fundamental timing strategies based on moving average (MA) timing signals could generate substantial performance gains relative to buy-and-hold strategies. The annualized average return of fundamental timing strategies reaches about 37% with Sharpe ratio nearly 1.30. These findings are robust to Fama-French factor model adjustment, alternative lag lengths of MA signals, holding days, and transaction costs. Moreover, the fundamental timing premium cannot be explained away by market timing or business cycle, and fundamental timing is more profitable among firms with high idiosyncratic volatility and high illiquidity.