Cross-asset momentum and the hybrid fund transmission mechanism in China’s stock and bond markets

by Xiaowei Wang, Rui Wang, Yichun Zhang

The allocation of assets across different markets is a crucial element of investment strategy. In this regard, stocks and bonds are two significant assets that form the backbone of multi-asset allocation. Among publicly offered funds (The publicly offered funds in China correspond to the mutual funds in the United States, with different names and details in terms of legal form and sales channels), the stock-bond hybrid fund gives investors a return while minimizing the risk through capital flow between the stock and bond markets. Our research on China’s financial market data from 2006 to 2022 reveals a cross-asset momentum between the stock and bond markets. We find that the momentum in the stock market negatively influences the bond market’s return, while the momentum in the bond market positively influences the stock market’s return. Portfolios that exploit cross-asset momentum have excess returns that other asset pricing factors cannot explain. Our analysis reveals that hybrid funds play an intermediary role in the transmission mechanism of cross-asset momentum. We observe that the more flexible the asset allocation ratio of the fund, the more crucial the intermediary role played by the fund. Hence, encouraging the development of hybrid funds and relaxing restrictions on asset allocation ratios could improve liquidity and pricing efficiency. These findings have significant implications for investors seeking to optimize their asset allocation across different markets and for policymakers seeking to enhance the efficiency of China’s financial market.