The Chinese Government Bond Returns

In this paper, we analyze the Chinese Government Bond (CGB) market. We find that CGB returns exhibit three common risk factors, which are well captured by three indices composed of short-, medium-, and long-term bonds. Moreover, these common risk factors exhibit strong momentum. In particular, weekly returns on medium and long maturity bond portfolios have a serial correlation of 27.73% and 31.29%, respectively. We further show that the serial correlation in bond returns allows significant profits from using simple momentum strategies. The strong momentum in bond portfolio returns indicates market inefficiencies. We further compare CGBs facing different restrictions on their trading in different markets and find that bonds with more restrictions allow more momentum profits.