Style Rotation Strategy In China

"Style" is broadly defined as any system of classification by market segments that have distinguishing characteristics. Style investing is a investment philosophy that aims to predict the relative performance of different style groups regardless of the fundamentals of each individual company and industry. The main content of this thesis is to put forward an effective trading strategy based on the style shift phenomenon of China’s stock market. The style shift that we are particularly interested in is the relative performance of small size stocks(in terms of market capitalization) in contrast with large size stocks. We argue that this phenomenon clearly exists in China’s stock market, and can be attributed to some leading factors, namely risk-free rate, credit spread, term spread and reversal indicator. Some macro numbers such as PMI and industrial added value can also contribute to our prediction. We build a model and conduct a back test to demonstrate that the strategy is profitable, with an out-of-sample annualized return of over 33% and a 2.19 Sharpe ratio using hypothetical index futures. The introduction of Shanghai 50 and CSI 500 index futures makes the strategy more feasible than before. We anticipate high demand for this strategy given its high return, low volatility and low correlation with existing products.