The Relative Performance of the PSR and PER Investment Strategies

Senchack, Andrew J.; Martin, John D.

doi:10.2469/faj.v43.n2.46

Cited by 23 publications

(14 citation statements)

References 2 publications

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“…His study of New York Stock Exchange companies for the time period [1956][1957][1958][1959][1960][1961][1962][1963][1964][1965][1966][1967][1968][1969][1970][1971] shows that an investor could have earned an annual excess return of 12.6% by investing in a portfolio of low P/E companies. Basu's findings have been confirmed subsequently using data from other exchanges and later time periods (Reinganum [1981], Cook and Rozeff [1984], Goodman andPeavy [1985, 1986], Senchak and Martin [1987], and Yobaccio [1994]). Dreman and Lufkin [1997] extend Basu's work further by examining whether contrarian strategies such as those based on P/E ratios work better within industries rather than marketwide.…”

Section: Introductionsupporting

confidence: 69%

“…Excess returns are calculated using the standard market model methodology. 5 Previous research has shown that the beta (systematic risk) of a firm is significantly correlated with P/E and P/S ratios (Basu [1977] and Senchak and Martin [1987]). Use of the market model methodology controls for the effects of beta on excess returns.…”

Section: Methodsmentioning

confidence: 98%

“…The authors do not examine the profitability of any trading strategies based on the values of the P/S ratios; nor do they include P/E ratios in their analysis or study Nasdaq firms. Senchak and Martin [1987] is the only study we are aware of that compares returns to trading strategies based on P/E ratios and P/S ratios. Their study of NYSE and AMEX stocks over the 1976-1984 time period finds that for annual holding periods low P/S stocks generated an excess return of 3.45% per year and low P/E stocks generated an excess return of 7.1% per year.…”

Section: Introductionmentioning

confidence: 98%

See 2 more Smart Citations

Returns to Trading Strategies Based on Price-to-Earnings and Price-to-Sales Ratios

Nathan

Sivakumar

Vijayakumar

2001

JOI

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Section: Introductionsupporting

confidence: 69%

Section: Methodsmentioning

confidence: 98%

Section: Introductionmentioning

confidence: 98%

See 1 more Smart Citation

Returns to Trading Strategies Based on Price-to-Earnings and Price-to-Sales Ratios

Nathan

Sivakumar

Vijayakumar

2001

JOI

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“…Senchack and Martin (1987), an early study, document that the high E/P strategy dominates the high sales-to-price ratio strategy on both an absolute and risk-adjusted basis in US stock markets. Hart et al (2003) examine the profitability of a broad range of stock selection strategies, including the Size, B/M, E/P and D/P indicators, for 32 emerging markets.…”

Section: Introductionmentioning

confidence: 97%

“…Second, as mentioned above, the relative performance of stock selection strategies is often measured as the returns on a nonzero-investment strategy, making an investment with the investors' own capital, as in the work of Senchack and Martin (1987) and Chou and Liao (1996). The relative performance of investment strategies can also be measured as the returns on a zero-investment strategy (also known as a premium), 564 MF 41,6 involving a long position in the winner portfolio and an offsetting short position in the loser portfolio, as in the studies of Hart et al (2003) and Park and Lee (2003).…”

Section: Introductionmentioning

confidence: 99%

The selection of popular trading strategies

2015

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Purpose – The relative performance of five popular nonzero-investment strategies, including Size, book-to-market ratios, earnings-to-price (E/P) ratios, cash flow-to-price (CF/P) ratios and dividend-to-price ratios, and their corresponding zero-investment strategies (also known as premiums) are first examined altogether for equally weighted (EW) and value-weighted (VW) methods to check whether a certain strategy (or some strategies) could be recommended to portfolio managers as the best (better) strategy (strategies). The paper aims to discuss these issues. Design/methodology/approach – This paper uses the stochastic dominance (SD) approach, a non-parametric test, to investigate the relative performance among various strategies and help investors search for the best or better strategy (strategies). Findings – The main results show that both the highest E/P and CF/P strategies (and their corresponding premiums) generally produce higher returns than the other three strategies (and their corresponding premiums) through allocating investors’ capital between the risky and risk-free assets for the EW and VW methods, respectively. Research limitations/implications – This study only examines US stock markets by SD approach, whether the results are consistent with non-US markets still needs further investigation. The findings imply that investors can benefit by investing in the highest E/P or CF/P stocks (or their corresponding premiums) to make more profit or less loss for US stock markets. Practical implications – First, the SD findings suggest that investors or portfolio managers can allocate their funds between risky and risk-free assets to maximize their profits. Next, the simulation results again prove that the profits of each nonzero-investment or zero-investment strategy for EW portfolios are higher than those of each corresponding strategy for VW portfolios. Finally, the findings imply that portfolio managers or investors can invest in the highest E/P or CF/P stocks (or their corresponding premiums) to make more profit or less loss. Originality/value – This study first uses an extensive data set (1952-2009) to examine the relative performance of nonzero-investment strategies and their corresponding zero-investment strategies for the five popular indicators altogether for the EW and VW methods with the SD approach for US stock markets. Moreover, the results reveal that the investors or portfolio managers can invest in the highest E/P and/or CF/P portfolios (or their corresponding premiums) to make more profit or less loss.

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Portfolio management using a factor‐analytic stock selection strategy

Badrinath

Kini

1992

Manage Decis Econ

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This study takes an integrated look at six widely documented price‐related CAPM anomaly variables. Using maximum likelihood factor analysis, we extract factors common to these variables. We find that portfolios formed according to the first extracted factor alone exhibit abnormal performance. Further, the performance of firms ranked on the basis of extracted factor scores for this factor is superior to that of firms selected on the basis of any one of the six variables. Our results have implications for (1) isolating missing factors in the CAPM specification and (2) designing dynamic portfolio strategies aimed at jointly exploiting more than one anomaly.

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The Relative Performance of the PSR and PER Investment Strategies

Cited by 23 publications

References 2 publications

Returns to Trading Strategies Based on Price-to-Earnings and Price-to-Sales Ratios

Returns to Trading Strategies Based on Price-to-Earnings and Price-to-Sales Ratios

The selection of popular trading strategies

Portfolio management using a factor‐analytic stock selection strategy

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