Sector Pricing And Sector Rotation In China’s A-share Market

Collecting and classifying are basic methods of understanding the complex world and finding its essential rules. In the stock market,"sector" as a concept of classification is mainly used in the fields of sector effect and sector rotation. Sector effects, have been demonstrated at both theoretical and practical levels, but the conclusions of sector rotation are still controversial.In this paper, we do analysis on sector rotation effect based on cyclical and non-cyclical classification of stocks in China’s A-share market. The research works around the pricing of sectors, assuming stock market factors endogenously and exogenously respectively, we analyze the factors those affect sector pricing from real economy, monetary conditions and stock market, and determine the cyclical and non-cyclical sector rotation effect of China’s A-share market.The analysis of sector rotation effects in China’s A-share market in this paper is mainly divided into the following four parts:In the first part, we do a simple overview of the existing sector classifications, combining with the essential characteristics of stock market, we emphasize the importance and representativeness of industry analysis, and in accordance to the principle of Occam’s razor, we divide the stock market as two sectors:cyclical sector and non-cyclical sector. This classification is the foundation of our research. In the second part, we analyze the sector pricing from the real economy, and use the cumulative returns and the difference of cyclical and non-cyclical sector returns as the measures of sector rotation variables, to answer the questions whether there are sector rotations with cyclical and non-cyclical sector and how real economy variables affect those rotations. In the third part, we analyze the sector pricing and sector rotations using monetary variables. At last, we study the sector rotations of cyclical and non-cyclical assuming stock market endogenously, and study the effects of market liquidity variables and investor preference variables. We drew our conclusions as following:(1) There are no rotation effects of cyclical and non-cyclical sectors on the time-series view when use monthly returns of sectors, but when using cumulative returns or monthly return differences of the two sectors, we could find a significant rotation phenomenon existed.(2) From the perspective of the real economy, there are sector rotation effects of cyclical and non-cyclical sectors, and the return difference of these two sectors will increase as the real economy booming and it will decrease as the real economy depressing. In addition to real economy variables, the DEI also affect the rotation effects of two sectors.(3) From the perspective of the monetary environment, there are sector rotation effects of cyclical and non-cyclical sectors too, and the return difference of the two sectors will increase as the money supply increasing and decrease as the money supply decreasing.(4) To the stock market factors, in China’s A-share market, the return difference of cyclical and non-cyclical sectors will increase as the market return increasing and decrease as the market return decreasing. In addition to this, market liquidity variables and investor preference variables will also affect the sectors pricing and sector rotations.Leaving the results above aside, there are some shortcomings in this paper: First, the article select samples from July2007to December2012, with a priori assume that there is no structural changes in the stock market and economy in this interval, which do not fit the reality fully. Secondly, we do not carry out a detailed analysis of specific industry rotations in our research. Thirdly, there are some defects about the data acquisition in our empirical process, for the reason of variables approximating procession, the results and interpretations of the empirical analysis in our paper may be not precise enough.The main innovations of this paper include the following:(1) The existing research literatures on the analysis of sector rotation is basically starting from the actual performance of the sector returns in the stock market, but the analysis in our paper is starting from the methodology and theory of assets pricing. In addition, the existing literatures on the industry division base more on a priori traditional industry classification or on the correlation analysis of its return and market returns, the former classification is too sweeping, while the latter is too arbitrary. In this paper, we do industry classification based on the correlation analysis of its operating income and real economy variables, which could help us to understand the real world and the stock market more.(2) Differing from most of the existing literatures those interpreting sector rotations under specific conditions, our paper do this work from the basic sector pricing model, so our analysis and conclusions on the stock market sector rotation may have more universal and promoting effects.(3) The article concludes that, there are no rotation effects of cyclical and non-cyclical sectors on the time-series when use monthly returns of sectors, rotation of these two sectors in China’s A-share market expresses more on the cross-sectional return differences.