Forecasting China Stock Market Returns by The Aggressive Stock-Selection Opportunity

Abstract

This study presents a novel definition of aggressive stock-selection opportunity (ASSO) and investigates its significant predictive potential for Chinese stock market returns. The ASSO includes the average of positive alphas coupled with the idiosyncratic volatilities of cross-sectional individual stocks. This study first explores anomalies unique to the Chinese Stock Market, using them to construct portfolios, then reports the correlation between these anomalies' returns and macro predictors. The empirical data from the Chinese stock market support ΔASSO's special function in forecasting Chinese stock market returns. Additionally, neither the average of positive alphas nor the average of idiosyncratic volatilities individually accounts for ΔASSO's predictive significance. Incorporating some macro predictors, this study demonstrates that ΔASSO not only possesses predictive power but also performs well alongside other macro predictors. These findings are expected to make a substantial contribution to the field of behavioral finance and investment strategy design in the context of the Chinese stock market. Keywords: aggressive stock-selection opportunity, stock-selection, Chinese stock market, stock market returns