The Dynamic Industry Return Predictability: Evidence from Chinese Stock Markets

This paper examines the dynamics, direction, and determinants of industry return predictability in Chinese stock markets during the period 1993-2015. Using the dynamic approach, we find that industry portfolio predictability is time varying and has wide variations across industries. Lagged returns in four industries (banking, real estate, leasing, and information technology) are positively associated with aggregate market returns, while lagged returns for traditional industries are largely inversely associated with market returns. Our findings are consistent with gradual information diffusion across economically-linked industries. The likelihood of industry predictability increases by 4.5-8% in a bull market over that in the bear market. Our results advise investors to distinguish industries and stock market conditions to better time the market.