Malaysia Stock Historical Data by fbx82765

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									 Global Asset Allocation and Stock Selection




Quantitative Stock Selection


           Campbell R. Harvey
                 Duke University
      National Bureau of Economic Research
Quantitative Stock Selection
1. Introduction

  Research coauthored with
•    Dana Achour
•    Greg Hopkins
•    Clive Lang
Quantitative Stock Selection
1. Introduction

Issue
Two decisions are important:
• Asset Allocation (country picks)
• Asset Selection (equity picks)
Quantitative Stock Selection
1. Introduction

Issue
• Considerable research on the asset
  allocation side
• Research has paid off in that many models
  avoided “overvalued” Asian markets in
  mid-1990s
• Many models began overweighing after the
  onset of the Asia Crisis
Quantitative Stock Selection
1. Introduction

Issue
• Little research on the stock selection side.
  Why?
   – Sparse data on individual stocks
   – Information asymmetries among local and
     global investors
   – Extremely high transactions costs
Quantitative Stock Selection
1. Introduction

With recent plummet in emerging markets,
stock selection is important.

If market is deemed “cheap,” (as many
asset allocation models would now suggest),
which stocks do we select?
Quantitative Stock Selection
2. Stock Selection Metrics

Ingredients for success:
• Identify stable relationships
• Attempt to model unstable relationships
• Use predictor variables that reflect the
  future, not necessarily the past
• Do not overfit
• Validate in up-markets as well as down
• Tailor to country characteristics in emerging
  markets
Quantitative Stock Selection
2. Stock Selection Metrics

Methodologies:
• Cross-sectional regression
• Sorting
• Hybrids
Quantitative Stock Selection
2. Stock Selection Metrics

Cross-sectional regression:
For country j, estimate:

         Ri ,t  g 0  g 1 Ai ,t 1   i ,t
where
i denotes firm i;
A is a firm specific attribute (could be multiple)
g are common regression coefficients
Quantitative Stock Selection
2. Stock Selection Metrics

Cross-sectional regression:
• Used in developed market stock selection
• Problem with unstable coefficients
• Bigger problem given noisy emerging market
  returns
Quantitative Stock Selection
2. Stock Selection Metrics

Sorting:
• Used in developed market stock selection
• Potentially similar in stability problems
• Can be cast in regression framework
   – (a regression on ranks, or a multinomial probit
     regression)
• Rank regression may have advantages given
  the high variance (high noise) in emerging
  equity returns
Quantitative Stock Selection
2. Stock Selection Metrics

Sorting:
• Simple methodology that provides a good
  starting point to investigate stock selection
Quantitative Stock Selection
2. Stock Selection Metrics

Hybrid:
• Create portfolios based on stocks sorted by
  attributes
• Use regression or optimization to weight
  portfolios
• Produces a flexible, highly nonlinear way to
  select stocks
Quantitative Stock Selection
3. Our methodology

Focus on three emerging markets:
• Malaysia (representative of Asia)
• Mexico (indicative of Latin America)
• South Africa (unique situation)
Quantitative Stock Selection
3. Our methodology

Specify exhaustive list of firm specific factors
• Includes many traditional factors
• Extra emphasis on expectations factors

Specific a number of diagnostic variables
• Includes factors that reflect the type of firm we
  are selecting
Quantitative Stock Selection
3. Our methodology

Identify the best stocks and the worst stocks
• Do not impose the constraints of a tracking
  error methodology
  [Tracking error can be dealt with at a later
  stage of the analysis]
Quantitative Stock Selection
3. Our methodology

Steps:

1. Specify list of factors
2. Univariate screens (in sample)
3. Bivariate diagnostic screens
4. Battery of additional diagnostics emphasizing
   performance through time
5. Bivariate selection screens
Quantitative Stock Selection
3. Our methodology

Steps:

6. Optimize to form “scoring screen” (in sample)
7. Run scoring screen on out-of-sample period
8. Diagnostics on scoring screen
9. Form “buy list” and “sell lists”
10. Purge “buy list” of stocks that are identified
  by predetermined set of “knock out criteria”
Quantitative Stock Selection
3. Our methodology

Steps:

11. Investigate turnover of portfolio
   – various holding periods analyzed
Quantitative Stock Selection
4. Past research

Very few papers:
• Rouwenhorst (JF) looks at IFC data
• Claessens, Dasgupta and Glen (EMQ) look at
  IFC data
• Fama and French (JF) look at IFC data
• Achour, Harvey, Hopkins, Lang (1998, 1999,
  2000)
Quantitative Stock Selection
4. Past research

What we offer:
• No one has merged IFC, MSCI, Worldscope,
  and IBES data
• First paper to look at comprehensive list of
  firm attributes
• First paper to look at expectational attributes
Quantitative Stock Selection
4. Factors

Fundamental factors
• Dividend yield
• Earnings yield
• Book to price ratio
• Cash earnings to price yield
• Change in return on equity
• Revenue growth
• Rate of re-investment
• Return on equity
Quantitative Stock Selection
4. Factors

Expectational
• Change in consensus FY1 estimate - last 3
  or 6 months
• Consensus FY2 to FY1 estimate change
• Consensus forecast earnings estimate
  revision ratio
• 12 months prospective earnings growth rate
• 3 year prospective earnings growth rate
• 12 month prospective earnings yield
Quantitative Stock Selection
4. Factors

Momentum
• One month/ 1 year price momentum
• One year historical earnings
  growth/momentum
• Three year historical earnings growth rate
Quantitative Stock Selection
4. Factors

Diagnostic
• Market capitalization
• Debt to common equity ratio
Quantitative Stock Selection
5. Diagnostics

•   Average return
•   Average excess return
•   Standard deviation
•   T-stat (hypothesis that excess return=0)
•   Beta (against benchmark index)
•   Alpha
•   R2
Quantitative Stock Selection
5. Diagnostics

•   Average capitalization
•   % periods > market index (hit rate)
•   % periods > market index in up markets
•   % periods > market index in down markets
•   Max number of consecutive benchmark
    outperformances
Quantitative Stock Selection
5. Diagnostics

•   Max observed excess return
•   Min observed excess return
•   Max number of consecutive negative returns
•   Max number of consecutive positive returns
•   Year by year returns
Quantitative Stock Selection
5. Diagnostics

• Factor average for constructed portfolio
• Factor median
• Factor standard deviation
Quantitative Stock Selection
6. Summary Statistics: Malaysia Benchmark

400
350
300
250
                                                87% drop
200
150
100
 50
  0
   1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

                             Malaysia IFC US$   Malaysia FX
 Data through January 2001
Quantitative Stock Selection
6. Summary Statistics: Mexico Benchmark

1000
 900
 800
 700
 600
 500                       68% drop
 400
 300
 200
 100
   0
    1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

                             Mexico IFC   Mexico FX
 Data through January 2001
Quantitative Stock Selection
6. Summary Statistics: South Africa Benchmark

300

250
200

150                                            55% drop
100
50

  0
   1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

                      South Africa IFC US$   South Africa FX
 Data through January 2001
                             -30
                                   -25
                                         -20
                                               -15
                                                     -10
                                                           -5
                                                                0
                                                                    5
                                                                        10
                                                                             15
                    Ca
                       p
                  D
                    RO
                        I
                    D
         1            /E
           Yr
              E     D
         3 arn iv
           Yr      M
              Ea om
                rn
                   M
                     om
             D       E
             FY /P
                 I
          D 3m
             FY o
         FY I 6m
             1
               to o
                   F




Top
           Re Y2
               v
                                                                                  6. Malaysia: Factor returns




                  Ra
                      t io
                    B/
                         P
          1        CE
            m /P
               o
                  M
           1         o




Bottom
             yr m
                  M
     Pr P om
       op rop
          3          E
      12 y r D /P
                                                                                                                Quantitative Stock Selection




        m
          o Ea
      24 Pr rn
        m op
          o          E
             Pr /P
                op
                     E/
                         P
                D
                    R
             Re ev
                 in
                    ve
                       st
         In RO
           de
              xr E
                  et
                     ur
                         n
                             -5
                                  0
                                      5
                                          10
                                               15
                                                    20
                                                         25
                                                              30
                                                                   35
                    Ca
                       p
                  D
                    RO
                        I
                    D
         1            /E
           Yr
              E     D
         3 arn iv
           Yr      M
              Ea om
                rn
                   M
                     om
             D       E
             FY /P
                 I
          D 3m
             FY o
         FY I 6m
             1
               to o
                   F
                                                                        6. Mexico: Factor returns




Top
           Re Y2
               v
                  Ra
                      t io
                    B/
                         P
          1        CE
            m /P
               o
                  M
           1         o




Bottom
             yr m
                  M
     Pr P om
       op rop
          3          E
      12 y r D /P
                                                                                                    Quantitative Stock Selection




        m
          o Ea
      24 Pr rn
        m op
          o          E
             Pr /P
                op
                     E/
                         P
                D
                    R
             Re ev
                 in
                    ve
                       st
         In RO
           de
              xr E
                  et
                     ur
                         n
                             0
                                 5
                                     10
                                          15
                                               20
                                                    25
                                                         30
                 Ca
                    p
               D
                 RO
                     I
                 D
      1            /E
        Yr
           E     D
      3 arn iv
        Yr      M
           Ea om
             rn
                M
                  om
           D         E
             FY /P
                 I
          D 3m
             FY o
         FY I 6m
             1
               to o
                   F




Top
           Re Y2
               v
                  Ra
                      t io
                                                              6. South Africa: Factor returns




                    B/
                         P
          1        CE
            m /P
               o
                  M
           1         o




Bottom
             yr m
                  M
     Pr P om
       op rop
          3          E
      12 y r D /P
                                                                                                Quantitative Stock Selection




        m
          o Ea
      24 Pr rn
        m op
          o          E
             Pr /P
                op
                     E/
                         P
                D
                    R
             Re ev
                 in
                    ve
                       st
         In RO
           de
              xr E
                  et
                     ur
                         n
                             0
                                 10
                                      20
                                           30
                                                40
                                                     50
                                                          60
                                                               70
                 Ca
                    p
               D
                 RO
                     I
                 D
      1            /E
        Yr
           E     D
      3 arn iv
        Yr      M
           Ea om
             rn
                M
                  om
           D         E
             FY /P
                 I
         D 3m
             FY o
         FY I 6m
             1
               to o
                   F




Top
           Re Y2
               v
                  Ra
                      t io
                    B/
                         P
          1        CE
            m /P
               o
                  M
           1         o




Bottom
             yr m
                  M
     Pr P om
       op rop
          3          E
      12 y r D /P
                                                                                                                      Quantitative Stock Selection




        m
          o Ea
      24 Pr rn
        m op
          o          E
             Pr /P
                op
                     E/
                         P
                D
                    R
                                                                    6. Malaysia: % Periods Benchmark Outperformance




             Re ev
                 in
                    ve
                       st
                   RO
                         E
                             0
                                 10
                                      20
                                           30
                                                40
                                                     50
                                                          60
                                                               70
                 Ca
                    p
               D
                 RO
                     I
                 D
      1            /E
        Yr
           E     D
      3 arn iv
        Yr      M
           Ea om
             rn
                M
                  om
           D         E
             FY /P
                 I
         D 3m
             FY o
         FY I 6m
             1
               to o
                   F




Top
           Re Y2
               v
                  Ra
                      t io
                    B/
                         P
          1        CE
            m /P
               o
                  M
           1         o




Bottom
             yr m
                  M
     Pr P om
       op rop
          3          E
      12 y r D /P
                                                                                                                    Quantitative Stock Selection




        m
          o Ea
      24 Pr rn
        m op
          o          E
             Pr /P
                op
                     E/
                         P
                                                                    6. Mexico: % Periods Benchmark Outperformance




                D
                    R
             Re ev
                 in
                    ve
                       st
                   RO
                         E
                            0
                                10
                                     20
                                          30
                                               40
                                                    50
                                                         60
                                                              70
                Ca
                   p
              D
                RO
                    I
                D
     1            /E
       Yr
          E     D
     3 arn iv
       Yr      M
          Ea om
            rn
               M
                 om
          D         E
            FY /P
                I
        D 3m
            FY o
        FY I 6m
            1
              to o




Top
                  F
          Re Y2
              v
                 Ra
                     t io
                   B/
                        P
         1        CE
           m /P
              o
                 M




Bottom
          1         o
            yr m
                 M
    Pr P om
      op rop
         3          E
     12 y r D /P
                                                                                                                         Quantitative Stock Selection




       m
         o Ea
     24 Pr rn
       m op
         o          E
            Pr /P
               op
                    E/
                        P
               D
                   R
            Re ev
                in
                   ve
                      st
                                                                   6. South Africa: % Periods Benchmark Outperformance




                  RO
                        E
      Quantitative Stock Selection
      6. Malaysia: Dividend Yield Screen: Index=100 each year

250


200


150


100


50


 0
   89


            90


                   91


                           92


                                  93


                                         94


                                                95


                                                       96


                                                              97


                                                                     98
 19


          19


                 19


                         19


                                19


                                       19


                                              19


                                                     19


                                                            19


                                                                   19
                   Top      Benchmark         Bottom
      Quantitative Stock Selection
      6. Mexico: Historical Earnings Momentum Screen:
                 Index=100 each year
300

250

200

150

100

50

 0
   89


            90


                   91


                          92


                                 93


                                        94


                                                95


                                                        96


                                                               97


                                                                      98
 19


          19


                 19


                        19


                               19


                                      19


                                              19


                                                      19


                                                             19


                                                                    19
                  Top     Benchmark          Bottom
      Quantitative Stock Selection
      6. South Africa: Change in Consensus FY1-3 mo. Screen:
                       Index=100 each year
200
180
160
140
120
100
80
60
40
20
 0
        93




                 94




                           95




                                    96




                                               97




                                                       98
      19




               19




                         19




                                  19




                                             19




                                                     19
               Top    Benchmark     Bottom
         Quantitative Stock Selection
         6. Book to Price: Low-High Spread



 50
 40
 30
 20
 10
  0
-10
-20
-30




                                                                                           South Africa
-40




                                                                                  Mexico
-50




                                                                       Malaysia
   89


          90


                 91


                        92


                               93


                                      94


                                             95


                                                    96


                                                           97


                                                                  98
 19


        19


               19


                      19


                             19


                                    19


                                           19


                                                  19


                                                         19


                                                                19
         Quantitative Stock Selection
         6. IBES Revision Ratio: Low-High Spread



 50
 40
 30
 20
 10
  0
-10
-20
-30




                                                                                           South Africa
-40




                                                                                  Mexico
-50




                                                                       Malaysia
   89


          90


                 91


                        92


                               93


                                      94


                                             95


                                                    96


                                                           97


                                                                  98
 19


        19


               19


                      19


                             19


                                    19


                                           19


                                                  19


                                                         19


                                                                19
         Quantitative Stock Selection
         6. IBES 12-month Prospective Earnings Yield: L-H Spread



 50
 40
 30
 20
 10
  0
-10
-20
-30




                                                                                           South Africa
-40




                                                                                  Mexico
-50




                                                                       Malaysia
   89


          90


                 91


                        92


                               93


                                      94


                                             95


                                                    96


                                                           97


                                                                  98
 19


        19


               19


                      19


                             19


                                    19


                                           19


                                                  19


                                                         19


                                                                19
         Quantitative Stock Selection
         6. One-year Momentum: Low-High Spread



 50
 40
 30
 20
 10
  0
-10
-20
-30




                                                                                           South Africa
-40




                                                                                  Mexico
-50




                                                                       Malaysia
   89


          90


                 91


                        92


                               93


                                      94


                                             95


                                                    96


                                                           97


                                                                  98
 19


        19


               19


                      19


                             19


                                    19


                                           19


                                                  19


                                                         19


                                                                19
         Quantitative Stock Selection
         6. Size Effect: Low-High Spread



 50
 40
 30
 20
 10
  0
-10
-20
-30




                                                                                           South Africa
-40




                                                                                  Mexico
-50




                                                                       Malaysia
   89


          90


                 91


                        92


                               93


                                      94


                                             95


                                                    96


                                                           97


                                                                  98
 19


        19


               19


                      19


                             19


                                    19


                                           19


                                                  19


                                                         19


                                                                19
Quantitative Stock Selection
6. Malaysia: Scoring Screen Various Holding Periods

         15
         10
          5
          0
          -5
         -10
         -15
         -20                           al
               ly



                         rly




                                                           t
                                                 KO




                                                         ke
                                     nu
             th



                      rte




                                                       ar
           on




                                               w/
                                  ian




                                                      M
                    ua
          M




                                               al
                                 m
                    Q




                                             nu
                               Se



                                          ian
                                         m
                                       Se




                        Top       Bottom
Quantitative Stock Selection
6. Mexico: Scoring Screen Various Holding Periods

   35

   30

   25

   20

   15

   10

    5

    0
                                       l
              ly




                         ly




                                                  t
                                     ua




                                                 ke
            th




                     ter




                                     n




                                              ar
        on




                                 ian
                    ar




                                             M
        M




                   Qu




                                 m
                                Se




                        Top   Bottom
Quantitative Stock Selection
6. South Africa: Scoring Screen Various Holding Periods

   20

   15

   10

    5

    0

    -5

   -10
                                          l
               ly




                          ly




                                                   t
                                        ua




                                                  ke
             th




                     ter




                                       n




                                               ar
         on




                                   ian
                     ar




                                              M
         M




                    Qu




                                  m
                                 Se




                     Top       Bottom
Quantitative Stock Selection
6. Malaysia: Scoring Screen
             % Periods Benchmark Outperformance
      100
       90
       80
       70
       60
       50
       40
       30
       20
       10
        0


                                           al
                 ly




                           rly




                                                          KO
                                         nu
               th




                        rte
             on




                                                        w/
                                      ian
                      ua
            M




                                                        al
                                     m
                      Q




                                                      nu
                                   Se




                                                   ian
                                                  m
                                                Se

                      Top        Bottom
Quantitative Stock Selection
6. Mexico: Scoring Screen
            % Periods Benchmark Outperformance
 100
  90
  80
  70
  60
  50
  40
  30
  20
  10
   0




                                            al
            ly




                             rly




                                          nu
          th




                          rte
        on




                                       ian
                        ua
       M




                                      m
                     Q




                                    Se
                  Top      Bottom
Quantitative Stock Selection
6. South Africa: Scoring Screen
             % Periods Benchmark Outperformance
 100
  90
  80
  70
  60
  50
  40
  30
  20
  10
   0




                                            al
            ly




                             rly




                                          nu
          th




                          rte
        on




                                       ian
                        ua
       M




                                      m
                     Q




                                    Se
                  Top      Bottom
      Quantitative Stock Selection
      6. Malaysia: Scoring Screen: Index=100 each year

250


200


150


100


50


 0
   89


            90


                   91


                          92


                                 93


                                        94


                                               95


                                                      96


                                                             97


                                                                    98
 19


          19


                 19


                        19


                               19


                                      19


                                             19


                                                    19


                                                           19


                                                                  19
                               Top    Bottom
      Quantitative Stock Selection
      6. Mexico: Scoring Screen: Index=100 each year

300

250

200

150

100

50

 0
   89


            90


                   91


                          92


                                 93


                                         94


                                                 95


                                                        96


                                                               97


                                                                      98
 19


          19


                 19


                        19


                               19


                                       19


                                               19


                                                      19


                                                             19


                                                                    19
                           Top        Bottom
      Quantitative Stock Selection
      6. South Africa: Scoring Screen: Index=100 each year

200
180
160
140
120
100
 80
60
40
20
 0
        93




                  94




                           95




                                     96




                                              97




                                                        98
      19




                19




                         19




                                   19




                                            19




                                                      19
                         Top    Bottom
                                          Quantitative Stock Selection
                                          6. Malaysia: Scoring Screen                                      IN SAMPLE         OUT OF SAMPLE
                                 900.00                                                                                                              160.00
                                                                                                                              T OP
                                                                                                                              FR
                                 800.00
                                                                                                                                                     140.00




                                                                                                                                                              CUMULATIVE RETURNS - OUT OF SAMPLE
                                 700.00
                                                                                                                                                     120.00
CUMULATIVE RETURNS - IN SAMPLE




                                 600.00
                                                                                                                                                     100.00

                                 500.00                                                                IFCG MALAYSIA

                                                                                                                                                     80.00

                                 400.00                IBES DATA
                                                       ADDED
                                                                                                                                                     60.00
                                 300.00


                                                                                                                                                     40.00
                                 200.00                                                                                       BOT T OM



                                                                                                                                                     20.00
                                 100.00



                                   0.00                                                                                                              0.00
                                     12/31/88   12/31/89   12/31/90   12/31/91   12/31/92   12/31/93   12/31/94   12/31/95     12/31/96   12/31/97
                                   Quantitative Stock Selection
                                   6. Mexico: Scoring Screen                                                 IN SAMPLE        OUT OF SAMPLE
                                 2100.00                                                                                                               250.00
                                                                                                                               T OP
                                 2000.00
                                 1900.00
                                 1800.00
                                 1700.00                                                                                                               200.00




                                                                                                                                                                CUMULATIVE RETURNS - OUT OF SAMPLE
                                 1600.00
CUMULATIVE RETURNS - IN SAMPLE




                                 1500.00
                                 1400.00
                                 1300.00
                                                                                                                                                       150.00
                                 1200.00
                                                                                               IFCG MEXICO
                                 1100.00
                                 1000.00
                                  900.00
                                                                                                                                                       100.00
                                  800.00
                                  700.00
                                  600.00
                                  500.00
                                                                                                                               BOT T OM
                                  400.00                                                                                                               50.00

                                  300.00
                                  200.00
                                  100.00
                                    0.00                                                                                                               0.00
                                      12/31/88   12/31/89   12/31/90   12/31/91   12/31/92   12/31/93   12/31/94   12/31/95      12/31/96   12/31/97
                                    Quantitative Stock Selection
                                    6. South Africa: Scoring Screen
                                                                       IN SAMPLE   OUT OF SAMPLE
                                 350.00                                                                                       120.00
                                                                           T OP




                                 300.00
                                                                                                                              100.00




                                                                                                                                       CUMULATIVE RETURNS - OUT OF SAMPLE
CUMULATIVE RETURNS - IN SAMPLE




                                 250.00
                                                                                                                              80.00

                                                                                    IFCG SOUT H
                                 200.00                                             AFRICA


                                                                                                                              60.00

                                 150.00
                                                                                                        BOT T OM


                                                                                                                              40.00
                                 100.00



                                                                                                                              20.00
                                  50.00




                                   0.00                                                                                       0.00
                                      12/31/92   12/31/93   12/31/94         12/31/95             12/31/96         12/31/97
Quantitative Stock Selection
7. Research Directions

1) Comparison of regression method and
  multivariate screening process
   – Panel multinomial probit models
   – How do we reduce the noise in emerging market
     equity returns?
Quantitative Stock Selection
7. Research Directions

2) What are the characteristics of countries that
  make some factors work and other not work?
   –   Stage of market integration process
   –   Industrial mix
   –   Openness of economy
   –   Microstructure factors
Quantitative Stock Selection
7. Research Directions

3) What causes the shifting importance of factors
  through time, e.g. value versus growth?
   – Can the cross-section of many stock returns help
     us identify when a factor is likely to work?
Quantitative Stock Selection
7. Research Directions

4) Can the country selection process be merged
  with the stock selection exercise?
   – Should “buy” portfolios be used in top-down
     optimizations?
   – Does country-specific tracking error really matter
     in global asset allocation?
Quantitative Stock Selection
7. Research Directions

5) Stability and migration tracking
   – Should we consider the behavior of the stock
     moving from fractile to fractile?
Quantitative Stock Selection
7. Research Directions

6) Should we expand our view of risk in both the
  stock selection and country selection exercises?
   – Mean, variance, skewness?
   – What are the driving forces of changing variance?
   – What are the determinants of skewness?

								
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