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Value investing and technical analysis in Taiwan stock market

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

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    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X13000711
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    Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

    Volume (Year): 26 (2014)
    Issue (Month): C ()
    Pages: 14-36

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    Handle: RePEc:eee:pacfin:v:26:y:2014:i:c:p:14-36
    Contact details of provider: Web page: http://www.elsevier.com/locate/pacfin

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