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The Profitability of Trading Strategies Based on Book Value and Earnings in Hong Kong: Market Inefficiency vs. Risk Premia
Author(s) -
Cheung Joseph K.,
Chung Richard,
Kim JeongBon
Publication year - 1997
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/1467-646x.00025
Subject(s) - inefficiency , earnings , profitability index , trading strategy , earnings yield , financial economics , price–earnings ratio , economics , stock (firearms) , yield (engineering) , value (mathematics) , business , econometrics , monetary economics , earnings per share , finance , mathematics , microeconomics , statistics , mechanical engineering , materials science , engineering , metallurgy
Using a sample of Hong Kong firms, we have examined the relative and incremental usefulness of book‐to‐price ratio (B/P), and earnings‐to‐price ratio (E/P) for providing profitable trading strategies or for predicting stock returns. Our results show that trading strategies based on B/P or E/P yield significant excess returns for various holding periods up to two years, and that B/P and E/P are not only individually but also incrementally useful for predicting stock returns. Further, results of various tests indicate that trading profits observed from the B/P strategy are likely to be a result of B/P proxying for risk differentials, while those from the E/P strategy are related to gains from exploitation of market inefficiency or mispricing. The two ratios appear to capture different aspects of firm value in Hong Kong.