Testing Benjamin Graham's Net Current Asset Value Strategy in London
15 Pages Posted: 6 Mar 2007
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Evidence on the Characteristics of Cross Sectional Variation in Stock Returns
By Kent D. Daniel and Sheridan Titman
-
Characteristics, Covariances, and Average Returns: 1929-1997
By James L. Davis, Eugene F. Fama, ...
-
Value Versus Growth: The International Evidence
By Eugene F. Fama and Kenneth R. French
-
Data-Snooping Biases in Tests of Financial Asset Pricing Models
By Andrew W. Lo and A. Craig Mackinlay
-
Conditioning Variables and the Cross-Section of Stock Returns
-
Conditioning Variables and the Cross-Section of Stock Returns
-
Risk and Return in an Equilibrium Apt: Application of a New Test Methodology
-
Can Book-to-Market, Size, and Momentum Be Risk Factors that Predict Economic Growth?
By Jim Kyung-soo Liew and Maria Vassalou