UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CAN INVESTMENT STRATEGIES BEAT THE MARKET? By HUYNH NHAT TRINH MASTER OF ARTS IN DEVELOPMENT ECONOMICS Ho Chi Minh City, August 2016 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Over the past three decades, many anomalies, known as investment strategies, have been documented on the global financial markets. However, from 2000s to now, several scholars have shown considerable changes in the magnitude of these excess returns. Therefore, the purpose of this thesis is to examine whether these investment strategies can be applied in Vietnam stock market or not. In addition, this thesis also provides the explanation of difference in returns.
By processing the data set containing of 689 listed firms in Ho Chi Minh Stock Exchange (HOSE) and Ha Noi Stock Exchange (HNX) during the period 2006 to 2014, this thesis examines three investment strategies including value investing, momentum investing and size investing. The evidences in Vietnam stock market confirms the existences of statistically value premium and size premium during the normal economic condition. During the financial crisis period, the results also confirm the value and size premium but they are not significant in the statistical point of view. In term of momentum investment strategy, it cannot be applied in reality when the results shown that the existences of momentum premium are not clear during the normal economic condition and financial crisis period.
Traditional risk based measures are also examined to find the explanation of anomalies. The results indicated that volatility can be used to explain the excess return but in term of beta, it cannot be used. The behavioral arguments are not covered in this thesis, so that an implication for future research refers towards the under and over-reaction in the value investment strategy, the size investment strategy, and the momentum investment strategy. i TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT First of all, I would like to express my utmost acknowledgement and appreciation towards my supervisor – Dr Ngo Minh Hai – for all the motivation, patience and support he has given me to complete this thesis.
This thesis would not have been completed without his support. He supported me when I was struggling with my thesis in order to get me on the right way again and to improve it. Besides, I would like to thank my family, especially my Mom, Dad and my girlfriend for the continuous support they have given me throughout my time in business school. I could not have done it without them.
Last but not least, it has been a long and fun learning process and I would like to thank my fellow graduate students at K20 for a memorable semester. Thanks to teachers and staffs in Vietnam – Netherlands Programme for their help during my process. ii TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS AMEX American Stock Exchange BV/MV Book value over market value ratio CAPM Capital Asset Pricing Model CF/P Cash flow to price D/P Dividend to price E/P Earning per share to price EPS Earnings per share FYE Fiscal year end GNP Gross National Product HML High Minus Low HNX Ha Noi Stock Exchange HOSE Ho Chi Minh Stock Exchange HPR Holding period return LIBOR London Interbank Offered Rate NASDAQ National Association of Securities Dealers Automated Quatations NYSE New York Stock Exchange P/B Price to book value P/E Price over earning per share U.S United State WRSS Weighted relative strength strategy iii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ABSTRACT. iii TABLE OF CONTENTS.
iv LIST OF TABLES. vi CHAPTER 1: INTRODUCTION .Error! Bookmark not defined.Error! Bookmark not defined.Error! Bookmark not defined. CHAPTER 2: LITERATURE REVIEW .Error! Bookmark not defined. Momentum Investment Strategy And Its Explanation .Error! Bookmark not defined.
International Evidence of Momentum Premium.Error! Bookmark not defined. Explanations of Momentum Strategy .Error! Bookmark not defined. Value Investment Strategy and Its Explanation .Error! Bookmark not defined. International Evidence of Value Premium .Error! Bookmark not defined.
Explanations of Value Strategy .2Error! Bookmark not defined. Size Investment Strategy and Its Explanation. Size Effect and Its Explanations .Error! Bookmark not defined. Variations of Size Effect .Error! Bookmark not defined.
Concentration of size effect in the smallest firms .Error! Bookmark not defined.7 CHAPTER 3: DATA AND METHODOLOGY .Error! Bookmark not defined.Error! Bookmark not defined.Error! Bookmark not defined. Value Investment Strategy .Error! Bookmark not defined. Momentum Investment Strategy. Size Investment Strategy.
36 iv TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 4: Empirical Results and Discussion .Error! Bookmark not defined. Value Investment Strategy .Error! Bookmark not defined. Size Investment Strategy .Error! Bookmark not defined. Momentum Investment Strategy .Error! Bookmark not defined.2 CHAPTER 5: CONCLUSION, LIMITATION AND IMPLICATIONS FOR FUTURE RESEARCH.Error! Bookmark not defined.Error! Bookmark not defined.
Value Investment Strategy. Size Investment Strategy. Momentum Investment Strategy .Error! Bookmark not defined. Limitations and Implication For Future Research .Error! Bookmark not defined.Error! Bookmark not defined.
52 v TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 2.1: Average monthly returns of small and large firms reported by Horowitz et al.Error! Bookmark not defined.1: Average monthly return and charactersitic of portfolios composed of value and growth portfolio (holding period of 1 year) .Error! Bookmark not defined.2: Average monthly return and charactersitic of portfolios composed of value and growth portfolio (holding period of 2 years) .Error! Bookmark not defined.3: Average monthly return and charactersitic of portfolios composed of large cap and small cap portfolio (holding period of 1 year) .Error! Bookmark not defined.4: Average monthly return and charactersitic of portfolios composed of large cap and small cap portfolio (holding period of 2 years) .Error! Bookmark not defined.5: Average monthly return and charactersitic of portfolios composed of winner and loser portfolio (6-6 month strategy) .Error! Bookmark not defined. vi TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1: INTRODUCTION 1. Problem statement In the view of the Market Efficiency Theory, obtaining an abnormal return would be impossible since all publicly available and private information has been already reflected into market price1. Therefore, the investors could not profit from employing any stock picking technique or investment strategy Recently, researchers have also reported a number of anomalies, which are conjectured as an evidence of mispricing, a trait of market inefficiency.
The mispricing is documented when a change in stocks price could not be explained or linked to any recently relevant information occurs in the market. Recent findings on the debates of investment strategies have suggested that firms with some specific fundamental characteristics such as low price-to-earnings, low market capitalization, could earn an abnormal return2. These findings are therefore addressed as evidence that contrast to the efficient market theory. However, the validity of evidence supporting the existence of inefficient markets is a fierce debate among researchers and hence, has not yet reached a consensus.
A potential issue is that the evidence of an existence of inefficient markets should be consistent over a long period. Otherwise, these could be considered as a product of data snooping3. However, recent empirical results have reported substantial discrepancies in premium of investment strategies since the original study4. Even though, the inability to explain and the dispersion of these evidence raise the question of their validity.
Additionally, the reliability of these results during the financial crisis, to some degree, is unveiled. 1 Fama(1970) 2 Basu (1977), Fama and French (1992), Lakonishok, Shleifer, Vishny (1994) 3 In generally accepted study practice, an initial hypothesis is developed based on economic rationale. Then, the statistical test is objectively conducted with selected data to confirm or reject the null hypothesis. However, data snooping means that data is examined with intend to develop the hypothesis instead of developing the hypothesis first.
4 Fama (1998) Page | 7 TIEU LUAN MOI download : skknchat@gmail.com In order to address the issues mentioned above, this thesis aims to find rigorous empirical evidence supporting the mispricing hypothesis. We imply several investment strategies with a mechanism based on the behavioral literature about the Value effect, the Momentum effect, and the Size effect in Vietnam stock market over the period from 2006 to 2014. Furthermore, the effect of the financial crisis of 2007-2009 on these investment strategies is also examined. Research questions In short, this thesis will answer the following questions: 1.
Whether could portfolios of value investing, size investing, or momentum investing generate abnormal returns on Vietnam stock market over the period from 2006 to 2014? 2. Whether could portfolios of value investing, size investing or momentum investing be applicable during the period of financial crisis? 3. What could be the reasonable explanations for these anomalies in Vietnamese stock market? 1. Thesis outline In answering the above problem statements, the thesis consists of the following chapters: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Data and methodology Chapter 4: Empirical results and discussion Chapter 5: Conclusions, limitation and implications for future research.
Page | 8 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 2: LITERATURE REVIEW 2. Momentum investment strategy and its explanations The early literature on market inefficiency regarding to strategies is known as relative strength strategies (momentum strategy) which takes the long position of past winners and the short position of past losers. The first study about momentum was conducted by Levy’s (1967), but its results are controversial. Then, many investors were still in 1990s and are still in 2010 applying the relative strength as one stock picking criteria.
International evidence of momentum premium Momentum returns in the U.S In 1993, an academic paper contending the idea that momentum strategy is able to produce an abnormal return is documented by Jegaddees and Titman. Using the data on NYSE and AMEX stocks exchange, they conducted an examination of 32 momentum strategies with different formation periods5 and holding periods during 1965 to 1989. In their studies, it was found that the returns from all those strategies were positive and were statistically significant over 3 to 12 holding periods. This scholar also contended that generally the strategies with long formation period and short holding period generated higher return compared to others strategies.
Furthermore, when Jegaddees and Titman test the performance of the 6 months/6 months strategy within sub-sample categorized by firm size (large cap, medium cap, and small cap) and by Beta (high beta, medium beta and low beta stocks), they found that all the returns were positive and had approximately the same magnitude to average return of entire sample. Therefore, they concluded that the performances of momentum strategies are not limited to any specific sub-samples of stocks. To evaluate the persistence of momentum effect over the medium term, Jegaddesh and Titman tracked the average performance of the portfolio in each of 36 months after formation date. 5 Stocks was selected basis of return over past J months.
J months is also called as formation period. Page | 9 TIEU LUAN MOI download : skknchat@gmail.com They found that the all monthly returns of zero portfolios were positive in the first year but negative in the second year and the first half of the third year. Based on these results, it indicated that abnormal returns from momentum strategies with 3 to 6 months holding periods were not permanent over time. In other words, the momentum in stocks price reversed over the medium term.
Another academic paper confirming the finding that momentum effect is not permanent over time is documented by Chan, Jegadeesh, and Lakonishok (1996). In this paper, the authors used the data on NYSE, NASDAQ exchange to examine the 6-month/6- month momentum strategy over a sample period from 1977 to 1993. The results in this paper showed that the momentum returns were positive over holding period of 1 year and 3 years but negative over 2 years. In short, the findings of this paper supported the ideas that the momentum in stocks price reversed over the medium term.