A Study on Performance of Contrarian Investment Strategy, Based on P/E Ratio： The Case of the Taiwan Stock Market
Date Issued
2006
Date
2006
Author(s)
Wang, Jia-hung
DOI
zh-TW
Abstract
Dr. Bondt and Thaler (1985) proposed the Overreaction theory that they believe the price of underestimated stock will readjust upward as the price of overestimated stock will readjust downward which creates an opportunity for investors to earn a risk premium by contrarian investment strategy of buying underestimated stocks and selling overestimated stocks. There are also scholars opposing such a theory, and believe that the profit from contrarian investment strategy is not a result of overreaction but January effect, or change of risk, etc.
The research investigates the performance of contrarian investment strategy based on P/E ratio which is in contrast to existing study and the result derived is based on the data of Taiwan stock market.
The result reveals that the loser portfolio consisting of stocks with low P/E ratio performs much better than the winner portfolio consisting of stocks with high P/E ratio. The research goes a step further to analyze the influence of January effect, and a similar result is derived even if the January effect is eliminated. The finding also indicates that the loser portfolio possesses a higher Sharpe ratio, that is, the loser portfolio enjoys a higher rate of return under each unit of investment risk.
Subjects
反向投資策略
本益比
過度反應
元月效應
contrarian investment strategy
P/E ratio
overreaction
January effect
Type
thesis
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