Academic journal article International Advances in Economic Research

A Re-Examination of the Performance of Value Strategies in the Athens Stock Exchange

Academic journal article International Advances in Economic Research

A Re-Examination of the Performance of Value Strategies in the Athens Stock Exchange

Article excerpt

Published online: 10 May 2013

[c] International Atlantic Economic Society 2013

Abstract This study tests the performance of contrarian (value) strategies in the Athens Stock Exchange (ASE) in a recent period of time (2003-8) on the basis of the price to earnings ratios, dividend yields, firm size (market value), market to book ratios, financial leverage ratios, and market beta. Apart from the univariate portfolio analysis, we implement a novel panel data analysis based on the procedure suggested by Pesaran (2004, Econometrica 74:967-1012, 2006) that provides a valid estimation and inference under cross sectional dependence. Our portfolio analysis results highlight for investors in the ASE the superiority of value strategies formed on the basis of stocks with low price-to-earnings, high dividend yield ratios, and low market-to-book ratios. Our panel data analysis results depend on whether or not we correct for the problem of cross-sectional correlation in the regression residuals as suggested by Pesaran's (Econometrica 74:967-1012, 2006) method. When we correct for this problem, we obtain evidence which support only a negative association between annual stock returns and market-to-book ratios. This may imply to investors that an adoption of a value strategy based on the market-to-book ratio may constitute a safer option compared with the other two alternatives suggested by the portfolio analysis results.

Keywords Value/growth strategies * Market efficiency * Panel data analysis

MEL G10 * G15 *C30

Introduction and Literature Review

The notion of value or contrarian strategies was first introduced in a systematic way by Lakonishok et al. (1994). They claimed that investors who are prepared to take long positions in stocks neglected by other investors due to their bad past performance are called value or contrarian investors. This is because they go contrary to the common, but rather naive, belief that these stocks will continue to show the same poor performance in the future. Thus, the actions of the naive investors who buy stocks with a superior past performance (glamour or growth stocks) and sell stocks with a corresponding poor performance (out-of-favour stocks) tend to excessively raise the prices of the first category and suppress the prices of the latter. This causes an over-valuation of the glamour stocks and an under-valuation of the out-of-favour stocks.

In the same study, Lakonishok et al. showed that over the April 1968 to April 1990 period, a contrarian strategy has substantially outperformed in terms of stock returns a similar naive strategy, without being inherently associated with more risk. This finding contradicted the view expressed by Ball and Kothari (1989) and Fama and French (1992) that the over-performance of value stocks may be attributed to the possibility that these stocks are potentially riskier than glamour stocks, while it is in agreement with the markets' overreaction hypothesis of DeBondt and Thaler (1985, 1987). Value stocks are identified in general as the stocks which had in the past either a low level of Price-to Earnings (PE) ratios or Market-to Book (MB) ratios, or a high level of Dividend Yield (DY).

A plethora of earlier empirical studies has established the so-called market anomalies or inefficiencies upon which value or contrarian strategies can be devised. Thus, it was found that stocks with low PE ratios can offer higher stock returns (e.g. Basu 1977; Jaffe et al. 1989; Chan et al. 1991). A similar finding also applied in the case of low MB ratios (e.g., Rosenberg et al. 1984; Fama and French 1992; Trecartin 2000; Phalippou 2008), high DYs (e.g., Litzenberger and Ramaswamy 1982; Elton et al. 1983; Levis 1989), and a low Market Value (MV). The latter anomaly is known as the size or small-firm effect and it was well documented by many empirical researchers (e.g. Bantz 1981; Levis 1989; Fama and French 1992). …

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