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Is Price to Earnings Ratio (still) useful for trading strategy?

Author

Listed:
  • Dedhy Sulistiawan

    (University of Surabaya)

  • Felizia Arni Rudiawarni

    (University of Surabaya)

Abstract

Overreaction phenomena stimulate assets mispricing and return reversals. Investors should build a trading strategy to receive benefits from the anomaly. Developing the classic idea of overreaction hypothesis from DeBondt and Thaler (1985 and 1990), we build stock portfolios based on sentiment and risk to produce higher future stock return. Using Indonesian data, we use financial information from public information to test weak-form efficiency. We believe that investors are not always rational and other groups of investors can use public information to generate excess return. This article finds that lower PER tend to produce higher future return, especially if lower PER accompanied by lower risk. Practically, our study contributes to the use of fundamental analysis in emerging markets. Theoretically, this study supports the idea of behavioral finance theory and reject weak-form efficient market hypothesis in Indonesia Stock Exchange.

Suggested Citation

  • Dedhy Sulistiawan & Felizia Arni Rudiawarni, 2019. "Is Price to Earnings Ratio (still) useful for trading strategy?," Proceedings of Business and Management Conferences 8511281, International Institute of Social and Economic Sciences.
  • Handle: RePEc:sek:ibmpro:8511281
    as

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    File URL: https://iises.net/proceedings/10th-business-management-conference-paris/table-of-content/detail?cid=86&iid=008&rid=11281
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Price Earnings Ratio (PER); Price to Book Value (PBV); stock risk; future return; trading strategy;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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