Empirical Study of Mix and Blend Strategies Based on the Earnings-to-Price Ratio and Price Momentum–The Case for the Taiwan Stock Market

This thesis examines two composite strategies: (1) the strategy of buying high earnings-to-price (EP) stocks, selling low EP stocks, buying high price momentum (PM) stocks, and selling low PM stocks, or the “mix strategy;” (2) the strategy of buying high EP, high PM stocks and selling low EP, low PM stocks, or the “blend strategy.” Two methods are used to compare the composite strategies with the original EP portfolio (buying high EP stocks and selling low EP stocks) and PM portfolio (buying high PM stocks and selling low PM stocks): (1) comparing average abnormal returns’ t-values; (2) comparing confidence intervals for abnormal returns’ means and standard deviations. Using the Taiwan stock market data from January 1998 to December 2007, we find that: (1) the composite strategies could outperform the original portfolios, regardless of the comparison method; (2) even though we impose short selling restrictions and high transaction costs on them, they could still beat the market. These results show that combining two negatively correlated stock selection indicators can significantly improve investment performance. Updated evidence on value and momentum effects and relations between value and momentum factors in the Taiwan stock market are also documented.