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Value investing and technical analysis in Taiwan stock market

Author

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  • Ko, Kuan-Cheng
  • Lin, Shinn-Juh
  • Su, Hsiang-Ju
  • Chang, Hsing-Hua

Abstract

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.

Suggested Citation

  • Ko, Kuan-Cheng & Lin, Shinn-Juh & Su, Hsiang-Ju & Chang, Hsing-Hua, 2014. "Value investing and technical analysis in Taiwan stock market," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 14-36.
  • Handle: RePEc:eee:pacfin:v:26:y:2014:i:c:p:14-36 DOI: 10.1016/j.pacfin.2013.10.004
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chuan-Hao Hsu & Hung-Gay Fung & Yi-Ping Chang, 2016. "The performance of Taiwanese firms after a share repurchase announcement," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1251-1269, November.
    2. repec:gam:jsusta:v:9:y:2017:i:8:p:1406-:d:107599 is not listed on IDEAS
    3. Fukuta, Yuichi & Yamane, Akiko, 2015. "Value premium and implied equity duration in the Japanese stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 102-121.
    4. Tsung-Hsun Lu & Jun-De Lee, 2016. "Is Abnormally Large Volume a Clue?," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(9), pages 226-233, September.
    5. Tseng, Yi-Heng & Chen, Shu-Heng, 2015. "Limit order book transparency and order aggressiveness at the closing call: Lessons from the TWSE 2012 new information disclosure mechanism," Pacific-Basin Finance Journal, Elsevier, pages 241-272.
    6. repec:spr:eurasi:v:7:y:2017:i:3:d:10.1007_s40821-016-0056-2 is not listed on IDEAS

    More about this item

    Keywords

    Book-to-market effect; Value investing; Technical analysis; Moving average; Taiwan stock market;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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