E/P Mean Reversion-Based Strategies for Investment Practice: Evidence from the Taiwan Market

Yan-Ting Lin, Shang-Chi Gong, Sou-Shan Wu and Tsung-Pei Lee

Emerging Markets Finance and Trade, 2012, vol. 48, issue 1, 117-131

Abstract: This study investigates the mean-reversion characteristic in firm-specific earnings-to-price ratios (E/P ratios) and proposes two investment strategies based on the detected mean-reversion feature of E/P ratios. We differentiate our study from other research by analyzing firm-specific time series data. The results show that, of the 1,156 nonfinancial firms listed on the Taiwan Stock Exchange and the GraTai Securities Market in 2006, the E/P ratios of 516 (about 45 percent) exhibited a tendency of mean reversion. Furthermore, we design two investment strategies based on the detected mean-reversion feature of firm-specific E/P ratios and report the dominant investment performances.

Keywords: E/P ratio; investment strategy; mean reversion; time series analysis (search for similar items in EconPapers)
Date: 2012
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