Value investing and technical analysis in Taiwan stock market

Kuan-Cheng Ko, Shinn-Juh Lin, Hsiang-Ju Su and Hsing-Hua Chang

Pacific-Basin Finance Journal, 2014, vol. 26, issue C, 14-36

Abstract: Unlike the U.S. and most developed countries, Taiwan stock market has been widely documented to have no value premium. Prior studies on the value premium typically adopt a conventional approach proposed by Fama and French (1992), which suggests a buy-and-hold strategy with annual rebalancing. We argue that a sophisticated investor can do better (obtain higher returns) than a simple buy-and-hold strategy by timing the market with the help of some technical analysis. Specifically, we show that an application of a moving average timing strategy to portfolios sorted by book-to-market (BM) ratios could generate higher returns than the buy-and-hold strategy. Using common stocks listed on the Taiwan Stock Exchange (TWSE), we confirm that the moving average timing strategy does substantially outperform the buy-and-hold strategy. Taking advantage of this observation, we propose a zero-cost portfolio constructed by buying the highest BM portfolio, and short-selling the lowest BM portfolio based on trading signals issued by the moving average rule, and demonstrate that such a new investment strategy can produce significantly positive returns. Robustness of results obtained in this paper is further verified and consolidated by extending the empirical study with a different currency, alternative lag lengths, transaction cost, subperiod analysis, business cycles and market timing.

Keywords: Book-to-market effect; Value investing; Technical analysis; Moving average; Taiwan stock market (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:26:y:2014:i:c:p:14-36

DOI: 10.1016/j.pacfin.2013.10.004

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