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Testing Benjamin Graham's Net Current Asset Value Strategy in London

15 Pages Posted: 6 Mar 2007  

Ying Xiao

University of Salford

Glen Arnold

University of Salford

Abstract

It is widely recognized that value strategies - those that invest in stocks with low market values relative to measures of their fundamentals (e.g. low prices relative to earnings, dividends, book assets and cash flows) - tend to show higher returns. In this paper we focus on the early value metric devised and employed by Benjamin Graham - net current asset value to market value (NCAV/MV) - to see if it is still useful in the modern context. Examining stocks listed on the London Stock Exchange for the period 1981 to 2005 we observe that those with an NCAV/MV greater than 1.5 display significantly positive market-adjusted returns (annualized return up to 19.7% per year) over five holding years. We allow for the possibility that the phenomenon being observed is due to the additional return experienced on smaller companies (the "size effect") and still find an NCAV/MV premium. The profitability of this NCAV/MV strategy in the UK cannot be explained using Capital Asset Pricing Model (CAPM). Further, Fama and French's three-factor model (FF3M) can not explain the abnormal return of the NCAV/MV strategy. These premiums might be due to irrational pricing.

Keywords: Market efficiency; Net asset value; Benjamin Graham

JEL Classification: G0

Suggested Citation

Xiao, Ying and Arnold, Glen, Testing Benjamin Graham's Net Current Asset Value Strategy in London. Available at SSRN: https://ssrn.com/abstract=966188 or http://dx.doi.org/10.2139/ssrn.966188

Ying Xiao (Contact Author)

University of Salford ( email )

M5 4WT Salford
United Kingdom

Glen Arnold

University of Salford ( email )

M5 4WT Salford
United Kingdom

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