Journal
PACIFIC-BASIN FINANCE JOURNAL
Volume 26, Issue -, Pages 14-36Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.pacfin.2013.10.004
Keywords
Book-to-market effect; Value investing; Technical analysis; Moving average; Taiwan stock market
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Unlike the U.S. and most developed countries. Taiwan stock market has been widely documented to have no value premium. Prior studies on the value premium typically adopt a conventional approach proposed by Fama and French (1992), which suggests a buy-and-hold strategy with annual rebalancing. We argue that a sophisticated investor can do better (obtain higher returns) than a simple buy-and-hold strategy by timing the market with the help of some technical analysis. Specifically, we show that an application of a moving average timing strategy to portfolios sorted by book-to-market (BM) ratios could generate higher returns than the buy-and-hold strategy. Using common stocks listed on the Taiwan Stock Exchange (TWSE), we confirm that the moving average timing strategy does substantially outperform the buy-and-hold strategy. Taking advantage of this observation, we propose a zero-cost portfolio constructed by buying the highest BM portfolio, and short-selling the lowest BM portfolio based on trading signals issued by the moving average rule, and demonstrate that such a new investment strategy can produce significantly positive returns. Robustness of results obtained in this paper is further verified and consolidated by extending the empirical study with a different currency, alternative lag lengths, transaction cost, subperiod analysis, business cycles and market timing. (C) 2013 Elsevier B.V. All rights reserved.
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