The Driving Forces of Stock Returns in Hong Kong

We comprehensively investigate what drives stock returns in Hong Kong stock market which has been consistently ranked as one of the most important markets for IPOs. We find that Hong Kong inflation rate is a systematic pricing factor across stocks after controlling for Fama-French three-factor. It is different from the US market and other developed markets that the momentum, dividend yield, cash-flow yield, earnings yield, and return-reversal factors are not significant pricing factors for stock returns in Hong Kong. Our Fama-MacBeath (1973) regressions show that a stock's value (cash-flow yield and book-to-market ratio) is the strongest predictor of stock returns in Hong Kong after controlling for market, value, and size factors and macroeconomic factors