An analysis on relations of price-earnings ratio and market capitalization to anomaly returns
Abstract
As the rise of the style investment worldwide, many researches and studies came on scene to test the validity of the Efficient Market Hypothesis. Among them, some most famous effects found included: P/E Effect, Size Effect, Calendar Effect, IPO Effect, etc. With the evolving of Vietnamese stock markets, especially VNIndex, this thesis tries to find out the anomaly returns due to P/E Effect, Size Effect, and the combination effect of P/E and Size during the period of 2007-2010. A total of 161 chosen companies are structured into final 35 portfolios based on different ranks in relative position of P/E and Size. Throughout 12 three-month portfolio reconstructuring periods, 746 daily returns observations are recognized and regression models are established. Finally, P/E Effect is found but contradictory to much prediction, neither lowest or highest P/E group outperformed the market but the moderate P/E class did it. Size Effect is also recognized with the outperforming of smallest market capitalization companies. The combination effect of Size and P/E are also realized with positive alphas generally belong to lowest market cap and lowest P/E groups. Mid cap and moderate P/E are also recognized as beating the market. However, poor results are found in big market capitalization and high P/E class with lowest mean returns over the period which associated to negative abnormal returns. A correlation test of Size and P/E did not found any special influence between the two. Take transaction costs into the findings did not make any significant alter to the
results.