Trend Factor in China

Because up to 80% of trading volume is driven by individual investors, price and volume trends play an important role in Chinese stock market, which is the second largest in the world. In this paper, we propose a trend factor based on both price and volume information cross horizons, capturing price momentum and trading liquidity. We find that volume contributes much more to the trend factor in China than in the US, due to large market participation of retail investors. In terms of factor investing, the trend factor enhances the opportunity set substantially. Augmenting the 3-factor of Liu, Stambaugh, and Yuan (2019), we propose a 4-factor model- market, size, value and trend -for the Chinese stock market. We find that the 4-factor model explains well a number of stylized facts and a set of 60 representative anomalies of the Chinese stock market. Moreover, the trend factor, as a composite of both price and volume trends, performs well too in the global markets.