Quality Effects: Evidence from Chinese Stock Market

Abstract

Abstract:

This paper studies the effect of quality factor in asset pricing based on Chinese A stock market. Derived from Gordon's growth model, we measure the quality of a listed stock by its profitability, safety, growth and dividend payout. This paper calculates "Quality Score" for each stock and examines how the Quality Score affects its price and return. This paper further constructs a QMJ (Quality Minus Junk) portfolio that goes long quality stocks and shorts junk stocks. The empirical results show that the stocks with higher quality score have higher relative prices and risk-adjusted returns; QMJ portfolio earns significant risk-adjusted return and is unaffected by market fluctuation; controlling for the QMJ factor, the size effect is significantly enhanced. For the robustness test, we also divide the samples into two subsamples according to the Non-Tradable Shares Reform, and empirical results are still robust.

Key words: quality, factor model, risk-adjusted return

Li Bin, Feng Jiajie. Quality Effects: Evidence from Chinese Stock Market[J]. , 2019, 31(3): 14-26.

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