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A Bayesian Model Averaging Approach to Enhance Value Investment

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  • Ron Bird

    (School of Finance and Economics, University of Technology, Sydney, Australia)

  • Richard Gerlach

    (Econometrics and Business Statistics, University of Sydney, Australia)

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Abstract

Simple financial ratios such as book-to-market are often used to identify value stocks. This paper examines the extent to which fundamental accounting information can be used to better identify truly undervalued value stocks to enhance profit in a simple value strategy. Gibbs sampling and model averaging are used in a logistic regression setting, employing fundamental accounting information as explanatory variables, in the design of an implementable investment strategy applied to markets in the US, the UK and Australia.

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Bibliographic Info

Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

Volume (Year): 5 (2006)
Issue (Month): 2 (August)
Pages: 111-127

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Handle: RePEc:ijb:journl:v:5:y:2006:i:2:p:111-127

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Related research

Keywords: model uncertainty; slice sampler; valuation ratio; forecasting; value investing;

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References

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  1. Zou, Hui & Yang, Yuhong, 2004. "Combining time series models for forecasting," International Journal of Forecasting, Elsevier, vol. 20(1), pages 69-84.
  2. K. Geert Rouwenhorst, 1999. "Local Return Factors and Turnover in Emerging Stock Markets," Journal of Finance, American Finance Association, vol. 54(4), pages 1439-1464, 08.
  3. Smith, M. & Kohn, R., . "Nonparametric Regression using Bayesian Variable Selection," Statistics Working Paper _009, Australian Graduate School of Management.
  4. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  5. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-64, December.
  6. Ou, Jane A. & Penman, Stephen H., 1989. "Financial statement analysis and the prediction of stock returns," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 295-329, November.
  7. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-82, June.
  8. Richard Gerlach & Ron Bird & Anthony D. Hall, 2000. "A Bayesian Approach to Variable Selection in Logistic Regression with Application to Predicting Earnings Direction from Accounting Information," Research Paper Series 47, Quantitative Finance Research Centre, University of Technology, Sydney.
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