The test of long term returns of value stocks – Does traditional EMH hold or can behavior finance explain the financial market better?

Zhong, Shangrong (2009) The test of long term returns of value stocks – Does traditional EMH hold or can behavior finance explain the financial market better? [Dissertation (University of Nottingham only)] (Unpublished)

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Abstract

This dissertation tests the long term performance of value investing strategy in the UK stock market. The stock sample of the test is FTSE 100. The time horizon is between the end of 2002 to the end of 2007, altogether 5 years. In addition, this paper is also trying to investigate the controversy between traditional EMH and behavioral finance. As these two theories have close links to value investing strategy, and they provide different explanations to interpret the phenomenon of stock market.

Furthermore, the result of this research shows that value stock portfolio achieved above than average return in UK stock market during the predetermined 5 years period. In addition, this result is also an evidence that supports behavioral finance and against EMH. The paper suggests that a possible flaw of EMH is that EMH is based on a too idealistic assumption, which is that market participants as a whole group is rational. On the other side, this paper considers behavioral finance to be a more reasonable and realistic theory. The key reason is that behavioral finance integrates human psychological factors into financial market, which is an important factor that has been ignored by traditional EMH for long time.

Finally, this paper also reviews its limitations. It is suggested that the value stock selection criteria in this dissertation should be improved for further research. The new criteria are suggested to categorize the whole stock sample into different industrial sectors first, and then further analyze the stocks according to their specific industrial characteristics. As a result, the suggested criteria should be able to provide more persuasive result to test value investing strategy in future.

Item Type: Dissertation (University of Nottingham only)
Depositing User: EP, Services
Date Deposited: 10 Aug 2010 10:29
Last Modified: 19 Nov 2016 12:04
URI: http://eprints.nottingham.ac.uk/id/eprint/23469

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