<ul><li> International University -
 School of Business Administration - </li></ul>An Analysis on Relations of Price-Earnings Ratios and Market Capitalization...
2<br />Day Trading<br />Value Investment<br />Style Investment<br />Growth Investment<br />Interest Rate Parity<br />Long/...
 P/B
 P/CF
 Leverage</li></ul>Scalping Trading<br />Event-Driven<br />Global Macro<br />Contrarian<br />Tape Reading<br /><ul><li> P/...
Content<br />Chapter 1 - Introduction<br />Chapter 2 - Literature Review<br />Chapter 3 - Study Design & Methodology<br />...
Chapter 1 - Introduction<br />	Background Context<br />	Objectives<br />	Implications of the Study<br />4<br />
<ul><li>Back Ground Context</li></ul>Chapter 1 – Introduction<br />Background Context<br />Objectives<br />Implications of...
<ul><li> Objectives</li></ul>Chapter 1 – Introduction<br />Background Context<br />Objectives<br />Implications of the Stu...
<ul><li>Implications of the Study</li></ul>7<br />Test the applicable characteristic of theories from advanced countries<b...
Chapter 2 - Literature Review<br />	Efficient Market Hypothesis<br />	Anomalies and Theories on Anomaly Measurements<br />...
<ul><li>Efficient Market Hypothesis</li></ul> - Security prices fully reflect all available information in the market in a...
<ul><li>Theories on Anomalies</li></ul>10<br />CAPM – Treynor (1961), Sharpe (1964), Lintner (1965), Mossin (1965)<br />As...
<ul><li>Researches on P/E Ratio</li></ul>Nicholson (1960)  Low P/E companies beat the market!<br />1960s McWilliam, Mille...
<ul><li>Researches on Size</li></ul>12<br />Smallest Firms Outperform<br />Banz & Reinganum (1981)<br />Chapter 1 -<br />C...
Chapter 3 - Study Design & Methodology<br />	The Study Design<br />	Data Collection Method <br />	The Study Construction<b...
<ul><li>The Study Design</li></ul>Study Design Summary:<br />   Stocks Studied: 161 (Excluded Fund Certificates)<br />   T...
15<br /><ul><li>Data Collection Method</li></ul>Stock’s Prices: Closing price<br />Risk Free Rate: Government 5-years bond...
<ul><li>The Study Construction</li></ul>16<br />Tickers collected<br />Data Phase<br />Study P/E Effect<br />Tickers  por...
<ul><li>Hypothesis Testing</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 – Study Design & 		             Methodolo...
Chapter 4 - Result Analysis & Discussion <br />	P/E Effect<br />	Size Effect<br />	Combination Effect of Size and P/E<br /...
<ul><li>P/E Effect</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 -<br />Chapter 4 – Result Analysis & 			Discussio...
<ul><li>Size Effect</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 -<br />Chapter 4 – Result Analysis & 			Discussi...
<ul><li>Combination Effect</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 -<br />Chapter 4 – Result Analysis & 			D...
<ul><li>Correlation of Size, P/E, & Other Considerations</li></ul>No Significant relationship found in the correlation bet...
Chapter 5 - Conclusion<br />23<br />Prices, <br /># of  Share, & Quarterly Profits<br />746 Daily Observations<br />161 ch...
<ul><li>Conclusion Table</li></ul>Chapter 1 -<br />Chapter 2 - <br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 – Concl...
25<br />:<br />10<br />09<br />08<br />07<br />06<br />05<br />04<br />03<br />02<br />01<br />00<br />00<br /><br />Than...
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Size And PE Factor Toward Vietnams Stocks Return

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My investigation over the period of 2007-2010 on Size and Price Earning factor as well as their combination affect toward Vietnam’s stock return.

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Size And PE Factor Toward Vietnams Stocks Return

  1. 1. <ul><li> International University -
  2. 2. School of Business Administration - </li></ul>An Analysis on Relations of Price-Earnings Ratios and Market Capitalization to Anomaly Returns<br /> Advisor: Le Hong Nhung, MBA<br /> Student: Ton That Hue Tri <br />1<br />
  3. 3. 2<br />Day Trading<br />Value Investment<br />Style Investment<br />Growth Investment<br />Interest Rate Parity<br />Long/Short<br />Gorilla Trading<br />Merger Arbitrage<br />Size<br />Value Factors<br />Sectors<br />Liquidity<br />Technical Analysis<br />Short Bias<br />Market Neutral<br />Distress Investment<br /><ul><li> P/E
  4. 4. P/B
  5. 5. P/CF
  6. 6. Leverage</li></ul>Scalping Trading<br />Event-Driven<br />Global Macro<br />Contrarian<br />Tape Reading<br /><ul><li> P/E Effect</li></ul>Triangular Arbitrage<br /><ul><li> Size Effect</li></ul>Quantitative Directional<br />Volatility Arbitrage<br /><ul><li> Combination Effect of </li></ul> P/E and Size<br />Fixed Income Arbitrage<br />130-30 Funds<br />
  7. 7. Content<br />Chapter 1 - Introduction<br />Chapter 2 - Literature Review<br />Chapter 3 - Study Design & Methodology<br />Chapter 4 - Result Analysis & Discussion <br />Chapter 5 - Conclusion<br />Appendices <br />3<br />
  8. 8. Chapter 1 - Introduction<br /> Background Context<br /> Objectives<br /> Implications of the Study<br />4<br />
  9. 9. <ul><li>Back Ground Context</li></ul>Chapter 1 – Introduction<br />Background Context<br />Objectives<br />Implications of the Study<br />Chapter 2 - <br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />5<br />I don’t know what happened there<br />People got top of the world here, and …<br />Nothing happened here<br />People committed suicide here.<br />Vietnam’s stock market is breath-taking!!!<br />
  10. 10. <ul><li> Objectives</li></ul>Chapter 1 – Introduction<br />Background Context<br />Objectives<br />Implications of the Study<br />Chapter 2 - <br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />6<br />Investigate P/E Effect<br />3 Main Targets<br />Investigate Size Effect<br />Investigate Combination Effect of P/E and Size<br />Find correlations between Size and P/E<br />2 Sub Targets<br />Give comment to Efficient Market Hypothesis<br />
  11. 11. <ul><li>Implications of the Study</li></ul>7<br />Test the applicable characteristic of theories from advanced countries<br />For Academic Community<br />Chapter 1 – Introduction<br />Background Context<br />Objectives<br />Implications of the Study<br />Chapter 2 - <br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />Proof for Efficient Market Hypothesis<br />Meaningful information for investment strategy<br />For Investment Community<br />Anchor to develop style investment strategies<br />
  12. 12. Chapter 2 - Literature Review<br /> Efficient Market Hypothesis<br /> Anomalies and Theories on Anomaly Measurements<br /> Empirical Researches on Price-earnings Ratio<br /> Empirical Researches on Market Capitalization<br />8<br />
  13. 13. <ul><li>Efficient Market Hypothesis</li></ul> - Security prices fully reflect all available information in the market in an unbiased and rapid manner -<br />Eugene Fama (1960s)<br />Chapter 1 -<br />Chapter 2 – Literature Review <br />Efficient Market Hypothesis<br />Theories on Anomalies<br />Empirical Researches on P/E Ratio<br />Empirical Researches on Size<br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />Assumptions:<br />Large number of profit maximizers<br />New information come randomly<br />Profit maximizers adjust prices rapidly to new information<br />9<br />Three forms of EMH:<br />Weak-form<br /> Semistrong-form<br /> Strong-form<br />Debate!!!<br />
  14. 14. <ul><li>Theories on Anomalies</li></ul>10<br />CAPM – Treynor (1961), Sharpe (1964), Lintner (1965), Mossin (1965)<br />Asset Return<br />SML<br />Chapter 1 - <br />Chapter 2 – Literature Review <br />Efficient Market Hypothesis<br />Theories on Anomalies<br />Empirical Researches on P/E Ratio<br />Empirical Researches on Size<br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />Risk-free rate of return<br />Beta<br />Expected Returni = RFR + βi(Market Return – RFR)<br />Difference between expected returns and actual returns Anomaly<br />
  15. 15. <ul><li>Researches on P/E Ratio</li></ul>Nicholson (1960)  Low P/E companies beat the market!<br />1960s McWilliam, Miller,Widmann, Breen, Savage<br />Chapter 1 - <br />Chapter 2 – Literature Review <br />Efficient Market Hypothesis<br />Theories on Anomalies<br />Empirical Researches on P/E Ratio<br />Empirical Researches on Size<br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />11<br />Low P/E Outperform<br />Basu (1977)  Low P/E still outperforms! After several adjustments<br />Johnson, Fiore, & Zuber (1989)<br />Staff (2004)  Canadian Equity<br />P/E Effect, but not from Low P/E<br />No P/E Effect<br />Growth Stock<br />Cyclical Stock<br />
  16. 16. <ul><li>Researches on Size</li></ul>12<br />Smallest Firms Outperform<br />Banz & Reinganum (1981)<br />Chapter 1 -<br />Chapter 2 – Literature Review <br />Efficient Market Hypothesis<br />Theories on Anomalies <br />Empirical Researches on P/E Ratio<br />Empirical Researches on Size<br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />Size Effect = Stable over time!<br />Brown, Kleidon, & Marsh (1982)<br />No Size Effect during 1967-1979 in US Equity<br />Predictive power of Size is unstable<br />Stoll & Whaley (1983)<br />Transaction cost<br />Reinganum (1983, 1992)<br />Holding Period Assumption<br />
  17. 17. Chapter 3 - Study Design & Methodology<br /> The Study Design<br /> Data Collection Method <br /> The Study Construction<br /> Hypothesis Testing<br />13<br />
  18. 18. <ul><li>The Study Design</li></ul>Study Design Summary:<br /> Stocks Studied: 161 (Excluded Fund Certificates)<br /> Time Scale: Mar 1st 2007 – Mar 1st 2010<br /> Rebalancing Period: 3 months  12 times of rebalancing<br /> Total 420 equal weighted portfolios constructed<br />Chapter 1 - <br />Chapter 2 -<br />Chapter 3 – Study Design & Methodology<br />The Study Design<br />Data Collection Method <br />The Study Construction<br />Hypothesis Testing<br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />P/E Effect<br />14<br />Size Effect<br />
  19. 19. 15<br /><ul><li>Data Collection Method</li></ul>Stock’s Prices: Closing price<br />Risk Free Rate: Government 5-years bond quotes<br />Quarterly Profit: Quarterly Reports, Unit used VND 1,000<br />Outstanding Share Number: Market capitalization divided by closing price<br />Eliminate Look-Ahead Bias: Date of forming portfolios chosen at the beginning trading day of Mar, Jun, Sep, and Dec for Q1, Q2, Q3, and Q4 respectively<br />Eliminate IPO Effect: Stock must be traded 3 months prior to the portfolio forming dates<br />Eliminate Survivorship Bias: Stock, which is excluded from VNIndex for any reason (switch to HNX Index, bankruptcy, etc.), is still taken into portfolios prior to the event’s date<br />Chapter 1 - <br />Chapter 2 -<br />Chapter 3 – Study Design & Methodology<br />The Study Design<br />Data Collection Method <br />The Study Construction<br />Hypothesis Testing<br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />
  20. 20. <ul><li>The Study Construction</li></ul>16<br />Tickers collected<br />Data Phase<br />Study P/E Effect<br />Tickers  portfolios<br />Chapter 1 - <br />Chapter 2 -<br />Chapter 3 – Study Design & Methodology<br />The Study Design<br />Data Collection Method <br />The Study Construction<br />Hypothesis Testing<br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />Divide P/E by scale of 5 & reallocate<br />Study Size Effect<br />Data Collected<br />Category daily returns calculated<br />P/E and Size calculated<br />Study Combination Effect<br />Synthesize returns throughout 12 periods<br />Study Correlation of P/E & Size<br />Run Regression each class to market  alpha<br />
  21. 21. <ul><li>Hypothesis Testing</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 – Study Design & Methodology<br />The Study Design<br />Data Collection Method <br />The Study Construction<br />Hypothesis Testing<br />Chapter 4 - <br />Chapter 5 - <br />Appendices <br />17<br />Hypothesis Establishing:<br />H0: μα = 0 – The mean of alpha is equal zero<br />H1: μα≠ 0 – The mean of alpha is statistically significant different from zero<br />Test statistic applied: t-test<br /> Population variance is unknown<br /> t-test is robust<br /> t-test is more conservative to z-test<br />Significant Level: 0.05 level of significance<br />p-value approach: p-value chosen to be 5%<br />
  22. 22. Chapter 4 - Result Analysis & Discussion <br /> P/E Effect<br /> Size Effect<br /> Combination Effect of Size and P/E<br /> Correlation of Size, P/E & other Considerations<br />18<br />
  23. 23. <ul><li>P/E Effect</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 -<br />Chapter 4 – Result Analysis & Discussion<br />P/E Effect<br />Size Effect<br />Combination Effect of Size and P/E<br />Correlation of Size, P/E & other Considerations<br />Chapter 5 - <br />Appendices <br />As P/E goes lower, mean returns tend to go higher along with alpha<br />Only PE3 – Moderate P/E is found to have reliable positive alpha of 0.06%<br />Contradictory to Nichoson (1960), McWilliam (1966), Midler & Widmann (1966), Breen (1968), & Basu (1977)’s finding that low P/E  outperform<br />Supportive to conclusion of Johnson, Fiore, & Zuber (1989) that there were some abnormal returns by using P/E but those not come from Low P/E<br />19<br />
  24. 24. <ul><li>Size Effect</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 -<br />Chapter 4 – Result Analysis & Discussion<br />P/E Effect<br />Size Effect<br />Combination Effect of Size and P/E<br />Correlation of Size, P/E & other Considerations<br />Chapter 5 - <br />Appendices <br />20<br />As Size goes lower, mean returns tend to go higher along with alpha<br />Only MC1’s alpha of 0.09% satisfies 95% confidence interval with p-value = 3%<br />Strongly supportive to Size Effect found by Banz & Reinganum (1981), Reinganum (1983, 1992), and Stoll & Whaley (1983)’s finding that low Market Cap  outperform<br />Is this finding contradictory to Brown, Kleidon, & Marsh (1982)? Not enough evidence to conclude Size Effect in HoSE is a long-run phenomenon or time-period effect<br />
  25. 25. <ul><li>Combination Effect</li></ul>Chapter 1 - <br />Chapter 2 -<br />Chapter 3 -<br />Chapter 4 – Result Analysis & Discussion<br />P/E Effect<br />Size Effect<br />Combination Effect of Size and P/E<br />Correlation of Size, P/E & other Considerations<br />Chapter 5 - <br />Appendices <br />21<br />
  26. 26. <ul><li>Correlation of Size, P/E, & Other Considerations</li></ul>No Significant relationship found in the correlation between Market Cap and P/E<br />No significant change in results after taking transaction cost into consideration<br />Mean Daily Transaction Cost = (((Buy cost)*8)/(5*52))<br />0.000923077% = ((0.03%*8)/(5*52))<br /> The combination effect of Size and P/E is actually come from both factors!<br />Chapter 1 - <br />Chapter 2 -<br />Chapter 3 - <br />Chapter 4 – Result Analysis & Discussion<br />P/E Effect<br />Size Effect<br />Combination Effect of Size and P/E<br />Correlation of Size, P/E & other Considerations<br />Chapter 5 - <br />Appendices <br />22<br />
  27. 27. Chapter 5 - Conclusion<br />23<br />Prices, <br /># of Share, & Quarterly Profits<br />746 Daily Observations<br />161 chosen companies<br />
  28. 28. <ul><li>Conclusion Table</li></ul>Chapter 1 -<br />Chapter 2 - <br />Chapter 3 - <br />Chapter 4 - <br />Chapter 5 – Conclusion<br />Appendices <br />24<br />Legend:<br /> Effect is proven<br /> Effect is not proven<br />
  29. 29. 25<br />:<br />10<br />09<br />08<br />07<br />06<br />05<br />04<br />03<br />02<br />01<br />00<br />00<br /><br />Thank You for Listening!<br />
  30. 30. Appendices <br />26<br />
  31. 31. <ul><li> Scope</li></ul>VNIndex<br /> 2007 – 2010<br />27<br /><ul><li>Limitations</li></ul>Sustainability<br />Potential of Sample Selection Bias<br /><ul><li>Suggestions for Further Studies</li></ul> a lot! <br />
  32. 32. 28<br /><ul><li>Key Concepts & Techniques</li></ul>Trailing P/E <br />= (Price Per Share) / (Most 4 recent quarters of EPS)<br />Market Cap <br />= (No. of share outstanding) x (Closing price)<br />Arithmetic Return<br />= ((Port value in time T+1) – (Port value in time T)) / (Port value in time T)<br />Mean Daily Arithmetic Return<br />=(1/n) x (Return Day 1st + Return Day 2nd + … + Return Day nth)<br />Abnormal Return<br />=(Actual Portfolio Return) – (Expected Portfolio Return)<br />Split Adjustment<br />Ticker’s returns are adjusted to 0% at the split day<br />
  33. 33. 29<br /><ul><li>Source of Information</li></ul>Stock’s Prices: VNDirect<br />Risk Free Rate: Hanoi Stock Exchange Website<br />Quarterly Profit: CafeF, Ho Chi MInh Stock Exchange Website, VNDirect, & Saigon Bank Berjaya <br />Outstanding Share Number: Vietstocks<br />

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