Chinese Stock Market Return Predictability: Adaptive Complete Subset Regressions

This paper proposes a new combination framework to explore the Chinese stock market return predictability. While most well-known predictor variables and simple combinations fail to beat the historical average benchmark, our adaptive complete subset regressions deliver statistically and economically significant out-of-sample performance. The subset, in which each regression includes five predictors, produces a significant statistic of 8.00% for January 2006 to September 2014. A mean-variance investor who uses the adaptive subset regressions forecasts, instead of the historical average forecasts, can obtain sizable utility gains of 7.60% per annum. The results of our paper suggest that there is significant predictability in the Chinese aggregate stock market portfolio.