Trading Strategy:

Book-to-Market Equity

Chao Chen| Qingzhou Cheng| Yu Guan|

Yifei Song| Bingchan Wang
Portfolio Management II
December 5, 2013

Market Anomalies

Numerical phenomenon-could not be

explained by CAPM model.
Investment strategy=>achieve higher
returns with lower risks
Styles: size effect, value effect, momentum,
BM value, LT reversal and ST reversal

Book-to-market Style

Based on firms book value of equity to the

market value of equity.
The investment strategy focusing on BE/ME
style perceived that value stocks have high
BE/ME ratio, and high BE/ME ratio leads to
better returns.

How to Form Portfolio?

Stocks are picked from all NYSE, AMEX, and

NASDAQ stocks pool.
Grouped into ten portfolio based on BE/ME

Lowest 10% BE/ME formed to Decile 1

Highest 10% BE/ME formed to Decile 10

Data Analysis
Summary statistics for the full sample (Value-Weighted, %):
Mean
Dec 1 (Low)
Dec 2
Dec 3
Dec 4
Dec 5
Dec 6
Dec 7
Dec 8
Dec 9
Dec 10 (High)
Dec 10-Dec 1
T-stat (D10-D1)

0.8392
0.9757
0.9423
0.9642
0.9952
1.0413
1.0424
1.2147
1.2702
1.3723
0.5331
-

St. Dev
5.7035
5.4884
5.3101
6.0388
5.7140
6.1487
6.4950
6.9026
7.4799
9.3246
6.5478
-

Sharpe
Ratio
0.0966
0.1253
0.1232
0.1120
0.1237
0.1225
0.1161
0.1342
0.1313
0.1163
0.0814
-

CAPM CAPM
FFbeta1 FFbeta2 FFbeta3
FF alpha
alpha
beta
(MKTEX) (SMB) (HML)
-0.0894 1.0013
0.0215
1.0632 -0.0669 -0.3399
0.0612 0.9792
0.1089
1.0063 -0.0316 -0.1453
0.0532 0.9394
0.0824
0.9583 -0.0346 -0.0835
-0.0015 1.0592
-0.0542
1.0399 -0.0361 0.1854
0.0709 0.9945
-0.0046
0.9686 -0.0622 0.2693
0.0768 1.0574
-0.0378
1.0088 -0.0338 0.3875
0.0490 1.1026
-0.1233
1.0159 0.0400 0.5507
0.1924 1.1477
-0.0440
1.0190 0.1199 0.7327
0.1915 1.2358
-0.0720
1.0791 0.2216 0.7858
0.1511 1.4587
-0.2496
1.1886 0.5495 1.1198
0.2404 0.4575
-0.2711
0.1253 0.6164 1.4597
1.2740 13.2064
-3.2548
7.6130 23.0119 61.2250

Data Analysis-Continued
Summary statistics for the full sample (Equal-Weighted, %):

Dec 1(Low)
Dec 2
Dec 3
Dec 4
Dec 5
Dec 6
Dec 7
Dec 8
Dec 9
Dec 10 (High)
Dec 10-Dec 1
T-stat (D10-D1)

Mean

St. Dev

0.7602
0.9816
1.0749
1.2356
1.2856
1.3467
1.4326
1.4939
1.7406
1.9917
1.2315
-

7.1902
6.7489
6.6634
6.9689
6.9402
7.1195
7.3180
7.7989
8.6830
10.4400
7.0642
-

Sharpe
Ratio
0.0657
0.1028
0.1181
0.1360
0.1437
0.1487
0.1564
0.1546
0.1673
0.1632
0.1743
-

CAPM CAPM
FFbeta1 FFbeta2 FFbeta3
FF alpha
alpha
beta
(MKTEX) (SMB) (HML)
-0.2802 1.1759
-0.2270
1.1003 0.6680 -0.4095
-0.0429 1.1512
-0.0599
1.0498 0.6210 -0.1630
0.0583 1.1388
0.0001
1.0158 0.6357 -0.0328
0.1856 1.1910
0.0688
1.0384 0.6506 0.1540
0.2448 1.1766
0.0869
0.9975 0.6992 0.2714
0.2905 1.2008
0.1034
1.0098 0.6875 0.3713
0.3784 1.1976
0.1457
0.9692 0.7937 0.4834
0.4071 1.2486
0.1187
0.9826 0.8707 0.6389
0.5856 1.3551
0.2322
1.0380 1.0078 0.8038
0.7630 1.4703
0.2687
1.0351 1.3543 1.1437
1.0432 0.2943
0.4957
-0.0652 0.6863 1.5532
4.8685 7.4833
4.3318
-2.8824 18.6495 47.4233

Sub-period analysis
Sub-period analysis (Value-Weighted, %):
1960s
Dec 1 (Low)
0.7686
Dec 10 (High) 1.0180
Dec 10-Dec 1 0.2494
T-stat (D10-D1) 0.7810

1970s
0.2792
1.3770
1.0978
2.3288

1980s
1.0875
1.9103
0.8228
2.2304

1990s
1.7243
1.4133
-0.3110
-0.7633

2000s Recessions Expansions

0.2548
-0.3918
0.9592
0.9212
-0.0625
1.5035
0.6664
0.3293
0.5443
1.6430
0.4789
3.0146

Monthly returns to Decile 1 and Decile 10 portfolios (Value-Weighted)

40
30
20
10
0
-10
-20

-30

D1

D10

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

Jan-94

Jan-93

Jan-92

Jan-91

Jan-90

Jan-89

Jan-88

Jan-87

Jan-86

Jan-85

Jan-84

Jan-83

Jan-82

Jan-81

Jan-80

Jan-79

Jan-78

Jan-77

Jan-76

Jan-75

Jan-74

Jan-73

Jan-72

Jan-71

Jan-70

Jan-69

Jan-68

Jan-67

Jan-66

Jan-65

Jan-64

Jan-63

Jan-62

Jan-61

Jan-60

-40

Sub-period analysis-continued
Sub-period analysis (Equal-Weighted, %):
1960s
Dec 1 (Low)
0.8289
Dec 10 (High) 1.5033
Dec 10-Dec 1 0.6743
T-stat (D10-D1) 2.5654

1970s
0.7263
1.8277
1.1014
2.5754

1980s
0.4114
1.8238
1.4123
4.4582

1990s
0.9885
2.0112
1.0227
2.8500

2000s Recessions Expansions

0.4276
-0.4301
0.8223
1.6173
0.1711
1.9829
1.1897
0.6012
1.1606
3.0426
0.9926
7.0714

Monthly returns to Decile 1 and Decile 10 portfolios (Equal-Weighted)

45

35
25
15
5
-5
-15
-25

Decile 1

Decile 10

Sep-13

Jul-12

May-11

Jan-09

Mar-10

Nov-07

Jul-05

Sep-06

Mar-03

May-04

Jan-02

Nov-00

Jul-98

Sep-99

May-97

Jan-95

Mar-96

Sep-92

Nov-93

Jul-91

May-90

Jan-88

Mar-89

Nov-86

Jul-84

Sep-85

Mar-82

May-83

Jan-81

Nov-79

Jul-77

Sep-78

May-76

Jan-74

Mar-75

Sep-71

Nov-72

Jul-70

May-69

Jan-67

Mar-68

Nov-65

Jul-63

Sep-64

Mar-61

May-62

Jan-60

-35

Jan-60
Apr-61
Jul-62
Oct-63
Jan-65
Apr-66
Jul-67
Oct-68
Jan-70
Apr-71
Jul-72
Oct-73
Jan-75
Apr-76
Jul-77
Oct-78
Jan-80
Apr-81
Jul-82
Oct-83
Jan-85
Apr-86
Jul-87
Oct-88
Jan-90
Apr-91
Jul-92
Oct-93
Jan-95
Apr-96
Jul-97
Oct-98
Jan-00
Apr-01
Jul-02
Oct-03
Jan-05
Apr-06
Jul-07
Oct-08
Jan-10
Apr-11
Jul-12

Time Series Plots

Monthly returns to the spread portfolio (Value-Weighted)

30

25

20

15

10

-5

-10

-15

-20

Jan-60

Jul-12

Apr-11

Jan-10

Oct-08

Jul-07

Apr-06

Jan-05

Oct-03

Jul-02

Apr-01

Jan-00

Oct-98

Jul-97

Apr-96

Jan-95

Oct-93

Jul-92

Apr-91

Jan-90

Oct-88

Jul-87

Apr-86

Jan-85

Oct-83

Jul-82

Apr-81

Jan-80

Oct-78

Jul-77

Apr-76

Jan-75

Oct-73

Jul-72

Apr-71

Jan-70

Oct-68

Jul-67

Apr-66

Jan-65

Oct-63

Jul-62

Apr-61

Time Series Plots-continued

Monthly returns to the spread portfolio (Equal-Weighted)

30

25

20

15

10

-5

-10

-15

-20

Thank You