Size- and Book-to-Market Anomalies on the JSE – Testing for the effect of market condition
The aim of market investors is to maximise their returns from the market. Often theydo this by the use of historical financial (and other relevant) information aboutcompanies and their share prices. The search for arbitrage opportunities has led tothe identification of anomalies such as the size and book-to-market effects but verylittle research has gone into the changing of these effects over time. They havegenerally only been identified over long time periods on markets around the world.This investigation used the returns of portfolios based on market capitalisation orbook-to-market ratio (or both) and regression analyses at specific dates at which themarket conditions changed from those of a bull market to those of a bear market.This study has shown that magnitude and direction of the size and book-to-marketeffects change over time and that the market condition (bull or bear) is not a directindicator of the state of the effect, although it does seem to suggest a lagged impact.The research suggests that there are significant and exploitable differences inportfolios chosen along the lines of market capitalisation or value indicators. Thoughno causal relationship for the existence of these anomalies has yet been identified, itseems that bear-market conditions have an impact on the magnitude (and direction)of anomalies.Since this impact continues to be seen after the bear markets, this knowledge couldbe exploited to reduce losses (by disinvesting in stocks that are likely to yield worseresults) or even increase gains in portfolios depending on prevailing marketconditions
Year of publication: |
2011-11-11
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Authors: | Gudde, Christian Rudolf |
Subject: | Johannesburg Securities Exchange | Investment | Share prices |
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