united kingdomen
Size and Value in China

Size and Value in China

06-12-2018 | From the field

Factor investing in A-share markets? This paper1 shows that the two classic Fama-French factors, size and value, are also powerful predictors of stock returns in China. To get the most out of these factors, the authors propose to tweak the definitions a bit.

  • David Blitz
    David
    Blitz
    Head of Quant Research

For the size factor they exclude the 30% smallest firms, which they justify by arguing that these companies are valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints. Their preferred value factor for China is the earnings-price ratio, which they find subsumes the book-to-market ratio that is typically used in academia.

The study shows that a three-factor model constructed in this way strongly dominates the standard Fama-French approach in China. As practitioners we prefer to use a diversified mix of value factors that work consistently across different markets, rather than trying to identify the one best metric.

The issue of reverse mergers, or backdoor listings, is one of the reasons why for our quantitative strategies we conduct more thorough fundamental screening of stocks listed in China to define a clean investable universe. 

1Liu, Stambaugh & Yuan, “Size and Value in China”, NBER Working Paper No. w24458, 2018.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe
From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

Read all articles
Subjects related to this article are:

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree