In Taiwan, the trading value of electronics related stocks makes up over 60% of Taiwan stock market and has grown gradually to the recent high of 70.03% in Dec. 2009. The high correlation between the TAIEX and TAIEX Electronic Index raises our interest to build a fund aiming to outperform TAIEX Electronic Index performance with similar risk as index by constructing an enhanced fund. We are keen to investigate if active management gain higher return than passive one according to our empirical study. This paper presents a combination effect of multi-factor model in the electronic sector and illiquidity, that expected returns are increasing in illiquidity. The major outcome is that we construct single industry Multi-Factor Model (MFM) and test for its prediction ability. The other is we form a proxy for illiquidity and incorporate it into the multi-factor model using Principal Component Analysis (PCA). The objective of this study is to discover mispriced stocks and make adjustments to build an enhanced fund, targeting 3% tracking error.
As a result, the most stable factors based on cumulative return in forecasting electronic sector are Leverage, Value3, ValueToGrowth, EarningQulity respectively. The average explanatory power of electronic multi-factor model (ELE-MFM) is around 52.4% over the sample from 2004/1 to 2009/12. For illiquidity measure, we run cross-regression of stock return on illiquidity and other stock characteristics from the period of 2000/1 to 2009/12. What we find is sub-period is the significant evidence for the work of illiquidity. With the PCA combination of electronic multi-factor model and illiquidity measure into scores coming from the first principal component, we rank stocks through it. With the appropriate constraint rules added into our quadratic programming, the portfolio using the techniques combining multi-factor model and liquidity measures shows IR 0.69, TE 3% and Alpha 2.04% in our sample period. The work of the electronic Multi-Factor Model (MFM) and the illiquidity measure showing satisfactory result support enhanced skills.
| Identifer | oai:union.ndltd.org:NSYSU/oai:NSYSU:etd-0211111-143841 |
| Date | 11 February 2011 |
| Creators | Lu, Shih-han |
| Contributors | C.C. Lee, Yih Jeng, P.F. Chen |
| Publisher | NSYSU |
| Source Sets | NSYSU Electronic Thesis and Dissertation Archive |
| Language | English |
| Detected Language | English |
| Type | text |
| Format | application/pdf |
| Source | http://etd.lib.nsysu.edu.tw/ETD-db/ETD-search/view_etd?URN=etd-0211111-143841 |
| Rights | not_available, Copyright information available at source archive |
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