DEA-based firm strengths and market efficiency in U.S. and Japan

Chanaka Edirisinghc, Xin Zhang and Shae-Chang Shyi

Chapter 32 in Handbook of the Fundamentals of Financial Decision Making:In 2 Parts, 2013, pp 611-635 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Efficient market theory suggests that economic fundamentals of public firms are strongly associated with stock returns in the capital markets. However, there is no universal metric of fundamental strength of a firm to verify market efficiency. In this chapter, we develop a Data Envelopment Analysis-based relative strength evaluation technique using publicly-available annual accounting data for a given group of firms (or market). Under an iterative configuration of the data as inputs and outputs, we search for the maximum attainable correlation between finn strength and stock returns. Such a maximum correlation, termed firm Strength-Based Efficiency (SEE) index for the market, measures the degree to which firm fundamentals play a role in stock returns in a particular economy. Computing SI3E is a difficult discrete optimization problem that is solved via a hybrid simulated annealing procedure. SEE index values appear to be similar for the overall (large cap) markets in the U.S. and .Japan, and past (observed) firm strengths have no explanatory power on future stock returns. Expectations on future strengths, computed using Book-to-Market, Earnings-Per-Share, Leverage, Asset Turnover, etc., are evident in stock returns up to 2 years in advance, but market risk has only a negligible effect in our relative framework.

Keywords: Financial Decision Making; Asset Pricing; Prospect Theory; Utility Theory; Risk Aversion; Static Portfolio Theory; Stochastic Dominance; Dynamic Modeling; Dynamic Portfolio Theory; Tactical Asset Allocation; Kelly Strategy; Capital Growth (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789814417358_0032 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789814417358_0032 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789814417358_0032

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().