Taming the Factor Zoo: New Evidence from China

Abstract

We address the well-known “factor zoo” problem in the Chinese stock market. By replicating a generation of pricing factors, we verify the Liu–Stambaugh–Yuan four-factor model which subsumes other counterparts in the Chinese A-share market. We further construct a characteristic library and apply the double-selection LASSO approach to explore whether significant anomalies contribute to current pricing factors. We find that some anomalies indeed play a significant role in pricing cross-sectional returns, but the improvement to the Liu–Stambaugh–Yuan four-factor model is limited.