Performance of
Investing Strategies
in Taiwan’s Stock
Market
January 8, 2015
Sponsored by:Value Partners Center for
Investing
2 | 7 P a g e s
Performance of Investing Strategies
in Taiwan’s Stock Market
Introduction
In this issue of our newsletter we investigate how several investing strategies based on a stock’s quantitative measures performed in Taiwan’s stock market and how their performance compares with that of the aggregate stock market. We find that the strategy based on a stock’s book-to-market ratio rewarded investors with significant positive returns in the 1987–2013 period. The monthly rebalanced portfolio consisting of the top 20% of stocks in terms of the book-to-market ratio outperformed the aggregate stock market in Taiwan by more than 1.1% a month in the past 20 years.
Data Sample
We download the daily total return index of each stock and of the Taiwan equity market, and the monthly prices, total return index and market value of each stock from Datastream. The exchange-traded funds (ETFs) and warrants are not included. We also delete the bottom one-third of stocks in terms of market value (i.e. the penny stocks). Our sample period is from January 1987 to December 2013. We construct five quantitative measures of a stock: market capitalization (size), book-to-market ratio, idiosyncratic volatility, one-month returns (short-term reversal) and past-six-month cumulative returns (momentum).
The Performance of Various Investing Strategies
First, we sort all stocks in our sample into five portfolios based on each of the five measures at the end of each month. We construct the equal-weighted one-month returns of each portfolio by taking the simple average of the returns of all stocks in the portfolio. We construct the value-weighted one-month returns of each portfolio by weighting the returns of each stock in the portfolio by the stock’s market capitalization. We then subtract the aggregate stock market returns from the equal- and value-weighted returns of each portfolio to obtain the outperformance of the portfolio against Taiwan’s stock market, namely the excess returns.
We find that the portfolio formed on a high book-to-market ratio significantly outperformed that formed on a low book-to-market ratio as shown in Table 1. We do not find the same results for the portfolios formed on the other four quantitative measures. We also find that the value- and equal-weighted zero-cost portfolios that long the stocks with the highest book-to-market ratios and short the stocks with the lowest book-to-market ratios generated returns of 1.06% and 1.55% and market-adjusted excess returns (alpha) of 1.09% and 1.51% in CAPM per month for
3 | 7 P a g e s Table 1: Returns of Various Investing Strategies for the Period from January 1987 to December 2013
Portfolio Market Value Short-term Reversal Momentum Idiosyncratic Vol. Book to Market
ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret 1 1.24% 1.24% 0.82% 0.54% 1.08% 0.96% 0.74% 0.54% 0.80% 1.13% (1.99) (2.00) (1.32) (0.92) (1.65) (1.50) (1.64) (1.04) (1.33) (1.86) 2 1.02% 0.99% 0.75% 0.84% 0.91% 0.85% 0.99% 0.75% 0.86% 0.74% (1.70) (1.67) (1.35) (1.50) (1.58) (1.45) (1.94) (1.46) (1.45) (1.28) 3 0.86% 0.84% 0.99% 0.77% 0.85% 0.89% 0.95% 0.75% 0.98% 1.05% (1.56) (1.53) (1.86) (1.48) (1.61) (1.69) (1.64) (1.31) (1.72) (1.90) 4 0.59% 0.55% 1.11% 0.81% 0.87% 0.82% 0.95% 0.64% 1.04% 1.03% (1.08) (1.01) (2.08) (1.47) (1.63) (1.46) (1.55) (1.05) (1.84) (1.84) 5 0.78% 0.68% 1.17% 0.95% 0.78% 0.65% 0.79% 0.49% 2.20% 2.07% (1.40) (1.20) (1.97) (1.60) (1.38) (1.15) (1.16) (0.73) (3.28) (3.10) 5-1 -0.46% -0.57% 0.35% 0.41% -0.30% -0.31% 0.05% -0.04% 1.53% 1.06% (-1.30) (-1.46) (0.93) (0.94) (-0.68) (-0.66) (0.12) (-0.09) (2.88) (1.97) Alpha -0.50% -0.59% 0.33% 0.34% -0.08% -0.12% -0.09% -0.18% 1.51% 1.09% (-1.47) (-1.52) (0.89) (0.81) (-0.18) (-0.25) (-0.23) (-0.38) (2.83) (2.00) Note: Adjusted t-statistics are in parentheses
Performance against the Aggregate Stock Market
We are also interested in the performance of these five investing strategies against the aggregate Taiwan stock market. We start from January 1991 because of the limited availability of data on the total market return index in Datastream. We find that the equal-weighted portfolio containing stocks with the highest book-to-market ratios significantly outperformed the aggregate stock market by 1.18% per month while the other investing strategies did not as shown in Table 2. The value-weighted portfolio containing stocks with the highest book-to-market ratios also significantly outperformed the aggregate stock market by 1.31% per month on average. In contrast, the value-weighted portfolio containing stocks with the largest market capitalization significantly underperformed the aggregate stock market by 0.2% per month.
Table 2: Excess Returns of Various Investing Strategies for the Period from January 1991 to December 2013
Portfolio Market Value Short-term Reversal
Momentum Idiosyncratic Vol. Book to Market
ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret 1 0.34% 0.34% -0.16% -0.45% 0.08% -0.01% -0.13% -0.30% -0.28% 0.05% (0.85) (0.86) (-0.43) (-1.40) (0.20) (-0.02) (-0.49) (-1.51) (-0.75) (0.16) 2 0.09% 0.08% -0.32% -0.23% -0.10% -0.17% 0.03% -0.19% -0.12% -0.24% (0.27) (0.21) (-1.07) (-0.97) (-0.35) (-0.75) (0.09) (-0.98) (-0.38) (-0.91) 3 0.01% -0.01% 0.00% -0.14% -0.05% -0.07% 0.07% -0.17% 0.11% 0.18% (0.05) (-0.02) (-0.01) (-0.78) (-0.18) (-0.36) (0.23) (-0.78) (0.35) (0.70) 4 -0.33% -0.36% 0.14% -0.14% -0.06% -0.08% 0.08% -0.21% 0.07% 0.07% (-1.27) (-1.40) (0.51) (-0.69) (-0.22) (-0.45) (0.24) (-0.75) (0.23) (0.22) 5 -0.13% -0.20% 0.16% -0.08% -0.06% -0.17% -0.07% -0.38% 1.31% 1.18% (-1.14) (-3.58) (0.51) (-0.33) (-0.17) (-0.61) (-0.19) (-1.02) (3.02) (2.90) Note: Adjusted t-statistics are in parentheses
4 | 7 P a g e s Performance Adjusted for Market Risk Factors
We now investigate how these strategies perform after controlling for local market risk factors, i.e. the market, value, size and momentum factors. We report the multifactor risk-adjusted returns (alphas) of the zero-cost portfolios based on our five quantitative measures. The one-factor model is the CAPM and has the market risk factor. The three-factor model has market, value (HML) and size (SMB) factors. The four-factor model additionally includes the momentum factor. We find that only the equal-weighted zero-cost portfolio formed on the book-to-market ratio yielded significant abnormal excess returns (alphas) in all multifactor models while the other portfolios did not as shown in Table 3.
Table 3: Alphas of the Zero-cost Portfolio based on the Local Market Factors
i-Factor Model
Market Value Short-term Reversal
Momentum Idiosyncratic Vol. Book to Market
ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret ew_ret vw_ret 1 -0.50% -0.59% 0.33% 0.34% -0.08% -0.12% -0.09% -0.18% 1.51% 1.09% (-1.47) (-1.52) (0.89) (0.81) (-0.18) (-0.25) (-0.23) (-0.38) (2.83) (2.00) 3 0.25% 0.30% 0.53% 0.61% 0.32% 0.31% -0.42% -0.53% 0.43% -0.15% (1.61) (1.59) (1.41) (1.44) (0.74) (0.68) (-1.15) (-1.21) (2.07) (-1.16) 4 0.25% 0.30% 0.46% 0.54% 0.11% 0.07% -0.45% -0.54% 0.42% -0.15% (1.59) (1.58) (1.29) (1.33) (0.48) (0.38) (-1.22) (-1.24) (2.02) (-1.22)
The Cumulative Payoff of a $1 Investment
In Figure 1, we investigate the cumulative payoff in dollar terms of investing $1 in the portfolios containing stocks having the lowest past-one-month returns (short-term reversal), market capitalizations, and idiosyncratic volatility values and the highest book-to-market ratios and past-six-month returns (momentum) with past-six-monthly portfolio rebalancing starting from January 1991. We also compare this payoff with the cumulative payoff from a $1 investment in the aggregate stock market in Taiwan. We find that the investing strategies based on a stock’s short-term reversal, momentum, market capitalization, idiosyncratic volatility and book-to-market ratio grew a $1 dollar investment into $6.89, $3.17, $4.94, $1.93, and $45.78 respectively in the 1991–2013 period, while the aggregate stock market turned $1 into $4.17 in the same period. This demonstrates that the investing strategy based on the book-to-market ratio dramatically outperformed the Taiwan stock market. These figures show that even small stocks are capable of outperforming the market, albeit only slightly, as shown in Table 2. The investing strategy based on a stock’s book-to-market ratio, which is a quantitative measure, outperformed the aggregate market both economically and statistically.
5 | 7 P a g e s
Figure 1. Cumulative Payoff of $1 Invested in Taiwan’s Total Market Index and in Portfolios with the Lowest Past-one-month returns (Short-term Reversal), Market capitalization, and Idiosyncratic Volatility and the Highest Book-to-Market ratio and Past-six-month returns (Momentum) with Monthly Portfolio Rebalancing in Taiwan’s Stock Market.
Conclusion
The monthly rebalanced investing strategy based on a stock’s book-to-market ratio rewarded investors with promising returns in Taiwan’s stock market in the 1987–2013 period. This value investing strategy also significantly outperformed the aggregate stock market. In our future newsletter, we will examine whether value investing strategies based on other quantitative measures can similarly outperform the aggregate stock market and deliver promising returns.
0 5 10 15 20 25 30 35 40 45 50 2/1/1991 11/1/1991 8/1/1992 5/1/1993 2/1/1994 11/1/1994 8/1 /19 95 5/1/1996 2/1/1997 11/1/1997 8/1/1998 5/1/1999 2/1/2000 11/1/2000 8/1/2001 5/1/2002 2/1/2003 11/1/2003 8/1/2004 5/1/2005 2/1/2006 11/1/2006 8/1/2007 5/1/2008 2/1/2009 11/1/2009 8/1/2010 5/1/2011 2/1/2012 11/1/2 01 2 8/1/2013
CUMULATIVE PAYOFF OF INVESTING STRATEGIES AND TAIWAN MARKET RETURN INDEX
February 1991 - December 2013
6 | 7 P a g e s About Value Partners Center for Investing (http://vpcenter.ust.hk/)
The Value Partners Center for Investing of the Hong Kong University of Science and Technology Business School is an academic and intellectual center supporting research and training on investing with an
emphasis on China and Hong Kong financial markets. It aims to promote Hong Kong's role as the regional asset management center. The center is sponsored by Value Partners Group Limited.
About Value Partners Group Limited (http://www.valuepartners.com.hk/en/home.html)
Value Partners is one of Asia’s largest asset management firms. Since its establishment in 1993, Value Partners has been a dedicated value investor with a focus on the Greater China region. The Group manages absolute return long-biased funds, long-short hedge funds, exchange-traded funds, quantitative funds, and private equity funds for institutional and individual clients in Asia Pacific, Europe and the United States.
Author Contact Information Dr. Samuel Xin Liang
Associate Director
Value Partners Center for Investing Tel: +852 2358 8204
Mobile: +852 9175 8951 Fax: +852 2358 1749 Email: [email protected]
Supporting Researchers: Ms. Cheuk, Man Yin Mr. Wei Yue
