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Return predictability between industries and the stock market in China

Author

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  • Yanying Zhang
  • Yiuman Tse
  • Gaiyan Zhang
Abstract
We examined the lead–lag relationship between industry portfolio returns and market returns in China, the largest emerging market, for the period 1993–2019. Using a bidirectional pairwise regression model, we found that the returns for banking and real estate not only predict market returns and returns for other industries but also predict industrial output growth. Since 2005, a shift in predictive ability from manufacturing to real estate has occurred, whereas banking has maintained consistent predictive power over the examined period. In the reverse direction, the stock market predicts the returns for mining and transportation. The predictive power of banking was amplified during the 2008 financial crisis; however, it decreased in 2015 due to turbulence in China's stock market. The market predictability of mining was enhanced in both periods. The in‐sample and out‐of‐sample tests suggest that certain industry predictability patterns remain to be exploited by China's stock market participants.

Suggested Citation

  • Yanying Zhang & Yiuman Tse & Gaiyan Zhang, 2022. "Return predictability between industries and the stock market in China," Pacific Economic Review, Wiley Blackwell, vol. 27(2), pages 194-220, May.
    • Handle: RePEc:bla:pacecr:v:27:y:2022:i:2:p:194-220
    DOI: 10.1111/1468-0106.12379
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