Moderate and Useful: The Performance of Quality Factor in Chinese Market

This study builds a quality-minus-junk factor (QMJ) for Chinese A-shares stock via partial least square method. Of the pillars contained in this factor, only the profitability indicators deliver consistent portfolio return, while growth, safety and dividend add little. QMJ retains positive but modest alpha after standard factors, largely overlapping with RMW, and it does help elevate the performance measured with Sharpe ratio of various portfolio. Its distinct value emerges when paired with size. The return of QMJ portfolio shows a convex curvature relation with SMB, generating clear evidence of market timing. Since the existing studies emphasize size factor is the main driving force stirring market in China, investors should consider the combination of quality with size, not using it alone.