Factor-Timing in the Chinese Factor Zoo : The Role of Economic Policy Uncertainty

This paper investigates the predictability of the economic policy uncertainty (EPU) on factor returns in the Chinese market. We find that the EPU significantly and negatively predicts the size premium (i.e., SMB, small-minus-big returns) in both short and long horizons. However, such results are not evident when predicting 15 other characteristic-related factor returns, including market, momentum, value, profitability, investment, and a range of mispricing or risk factors. The results are robust to various control variables and out-of-sample tests. The evidence further supports that EPU can contribute to the factor timing, especially the size timing, in stark contrast to the evidence in the U.S. market. Economically, both the cash flow and the flights-to-safety channels may account for the predictive power