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Stock screening with use of factor analysis and fuzzy multiple criteria decision making

Author

Listed:
  • Malek Tahoori
  • Safar Fazli
  • Reza Kiani Mavi

Abstract

Screening is a process in which a large set of alternatives is reduced to a smaller set that most likely contains the best choice. In this paper, a new method for stock screening is proposed. Two general criteria are used. The first of them is based on the financial indices and may be treated as the criterion of firm's 'health'. The second one is the firm's market success criterion that is based on the stock prices. Previous research has shown that there are many factors that are important for financial analysis. Factor analysis is a data reduction technique, which can be applied in financial analysis. This technique thus applied to determine the factors that are important for stock screening. The method rests on the selection of the stocks with a great correlation of the firm's financial performance and its market success. As an example, the values of financial ratios and prices of 24 firms from the pharmaceutical industry of Tehran stock exchange were used. It is shown that the proposed method makes it possible to select a small group of 'good' stocks.

Suggested Citation

  • Malek Tahoori & Safar Fazli & Reza Kiani Mavi, 2011. "Stock screening with use of factor analysis and fuzzy multiple criteria decision making," International Journal of Procurement Management, Inderscience Enterprises Ltd, vol. 4(1), pages 87-107.
    • Handle: RePEc:ids:ijpman:v:4:y:2011:i:1:p:87-107
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