Macroeconomic Regimes, Liquidity, and Volatility in Barra-Style Factor Returns: Evidence from China’s A-Share Market

Abstract

The dynamics of China's A-share market are shaped by both macroeconomic fluctuations and the unique characteristics of its institutional environment. This study investigates how short-term business cycles impact the returns of Barra Style Factors (BSF) through key macro-financial channels, including global capital market liquidity, volatility, and multi-market linkages. Using daily data from 2019 to 2024, we employ a time-varying vector autoregression (TVP-VAR) model and rolling window Granger causality tests to capture the evolving relationships between macroeconomic variables and market factors. The results demonstrate that economic growth and inflation primarily affect factor returns indirectly, via liquidity dynamics and volatility-driven revaluation, while capital flows exhibit asymmetric mediating effects due to China's partially open capital account. Specifically, liquidity expansion during growth phases strengthens momentum and size factors, while liquidity contraction during inflationary periods suppresses leverage and value factors. Volatility transmits macroeconomic uncertainty, increasing the risk premium on residual volatility, and cross-border flows further amplify the cyclical fluctuations of large-cap stock portfolios. These findings underscore the periodicity of factors rooted in the financial microstructure of China’s market, revealing unique macro-financial linkages in comparison to mature economies. The study provides theoretical insights into the transmission of macroeconomic shocks and practical guidance for cyclical style allocation in China's policy-driven market.