Accessing the China A-Shares Market via Minimum-Variance Investing

Abstract

As the China A-shares market is receiving more attention from international investors because of its expanding market size and improved access, means of accessing the market have become an important topic. The authors suggest the use of minimum variance investing as an alternative to the traditional market cap approach for accessing the China A-shares market. Their portfolio construction method takes into account the stock suspension features of the China A-shares market, and the simulated results show that China A-shares minimum variance investing is capable of achieving volatility reduction. The study also observes return enhancement from the minimum variance strategies for the 2007–2017 period. The authors compare minimum variance investing in different markets and find that the volatility reduction in the China A-shares market is lower compared with other major equity markets despite its superior historical return. This can be attributed to its smaller ex ante volatility reduction and forecastability of the ex post volatility. The authors investigate two methods of applying factor exposure control of the minimum variance portfolio. The results show that a value and quality factor overlay does not affect the volatility reduction capability and helps to enhance the return of the China A-shares minimum variance portfolio through the capture of factor risk premium.

TOPICS: Emerging, portfolio construction, analysis of individual factors/risk premia, risk management