Applicability of Various Stock Selection Indicators in the Taiwan Stock Market--A Study on Sector Effect and Market Timing
Date Issued
2007
Date
2007
Author(s)
Hwang, Kuo-Chang
DOI
zh-TW
Abstract
By applying the research methodologies of Fama and French (1992) to the historical data of the 276 publicly listed companies in Taiwan between the dates of January 1998 to October 2006, we investigate the five most commonly used stock selection indicators amongst investors: price to earnings per share ratio(P/E), price to book-value(P/B), earnings growth rate, market capitalization and beta. Using these five leading indicators we are looking to determine its effectiveness in explaining and predicting stock subsequent performance. Variables that are chosen in this research is based on the most practical data analysis methodologies adopted to similar tests for different investment horizons and industries with the goal to achieve better applicability. These should help investors better understand its effectiveness in timing the usage of these indicators to increase investor confidence levels.
Our empirical results show that in the long term, companies with low P/E’s enjoy higher expected returns, while earnings growth is a more appropriate long term indicator as data suggests earnings performance is still the best indicator for stock performance. However these indicators do not explain short term share price fluctuations especially when the market is in a downward trend cycle.
In terms of cyclical sectors, market capitalization is both a good long/short term stock selection indicator while P/B and P/E are more appropriate for long term indicators; though ineffective in the short term. For cyclical names, both large capitalization companies and low P/B and P/E companies also provide better returns.
With regards to the technology sector, there appear to be no appropriate long term stock selection indicator; however in an upward trend market, beta could be a practical indicator. Low beta companies giving better returns contradict the financial theoretical understandings. It is possible that these results explain the “catch up effect,” suggesting the technology stock selection indicator differs from other sectors.
Subjects
選股指標
本益比
股價淨值比
盈餘成長率
公司規模
β值
報酬率
stock selection indicators
price to earnings per share ratio(P/E)
price to book-value(P/B)
earnings growth rate
market capitalization and beta
Type
thesis
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