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Size And PE Factor Toward Vietnams Stocks Return
 

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.

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 Size And PE Factor Toward Vietnams Stocks Return Presentation Transcript

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

      Thank You for Listening!
    • Appendices
      26
      • Scope
      VNIndex
      2007 – 2010
      27
      • Limitations
      Sustainability
      Potential of Sample Selection Bias
      • Suggestions for Further Studies
      a lot! 
    • 28
      • Key Concepts & Techniques
      Trailing P/E
      = (Price Per Share) / (Most 4 recent quarters of EPS)
      Market Cap
      = (No. of share outstanding) x (Closing price)
      Arithmetic Return
      = ((Port value in time T+1) – (Port value in time T)) / (Port value in time T)
      Mean Daily Arithmetic Return
      =(1/n) x (Return Day 1st + Return Day 2nd + … + Return Day nth)
      Abnormal Return
      =(Actual Portfolio Return) – (Expected Portfolio Return)
      Split Adjustment
      Ticker’s returns are adjusted to 0% at the split day
    • 29
      • Source of Information
      Stock’s Prices: VNDirect
      Risk Free Rate: Hanoi Stock Exchange Website
      Quarterly Profit: CafeF, Ho Chi MInh Stock Exchange Website, VNDirect, & Saigon Bank Berjaya
      Outstanding Share Number: Vietstocks