TIME REWARD OF VALUE INVESTING: EVIDENCE FROM THE SOUTHEAST ASIA STOCK MARKETS

Year 2017, , 70 - 86, 30.06.2017

Yosuke Kakinuma

https://doi.org/10.17261/Pressacademia.2017.436

Abstract

Purpose-
This study tests the effectiveness of
value investing and its relation to the length of investment horizon in
Malaysia, Singapore, and Thailand stock markets as well as the ASEAN market as
a whole. Two simple financial ratios, namely, Price-to-Earning (PE) ratio and
Price-to-Book (PE) ratio, are employed to see if they represent value premium
in a long-term investment. 

Methodology-
A simulation methodology that randomly selects an investment
date is applied which effectively eliminates market timing bias. Portfolios
sorted by PE and PB ratios are formed on a randomly chosen date and held for
different periods of time. Additionally, Fama-Mcbeth (1973) regression checks a
robustness of value premium of PE and PB ratios.

Findings-
Portfolios constructed with low PE and
PB ratio generate higher returns and form efficient portfolios with better
risk-return trade-off. In a long-term investment, PE and PB are indicators of
value premium. Also, the ASEAN Link provides an excellent opportunity for
international diversification.

Conclusion- Value investors are rewarded for holding
portfolios with low PE and PB stocks for a long period of time. Furthermore,
investors should construct portfolios with stocks from different markets to
fully take advantage of international diversification, which significantly reduces
investment risk.  

Keywords

Value investing, long-term investment, international diversification, financial simulation, emerging markets

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