Factor investing in China: abundant opportunity, but beware of structural breaks

Breadth and depth, significant cross-sectional stock dispersion, high liquidity and competitive transaction costs make China’s A-shares market attractive for alpha-oriented quants. What really sets the market apart, however, is the unique development of China’s regulatory landscape.

To avoid overfitting a model based on historical data, it is important to understand how policy affects market behavior. We describe important regulatory changes in the Chinese A-shares market over the past decades, analyze the impact of these changes on market efficiency and investigate the relevance of past data – and what it all means for factor investing strategies.