Essays on Stock Market Anomalies

Abstract

The objective of this doctoral thesis is to examine the efficacy of anomaly-based equity trading strategies in the Finnish and the U.S stock markets. The main focus in the papers included in this thesis is on different manifestations of value anomalies, but the momentum, size, profitability, and investment anomalies are also examined. In addition, the value indicators are combined with each other, as well as with a momentum indicator, by employing multicriteria decision-making (MCDM) methods.

The thesis consists of four publications, each of them having a distinct focus and contribution. Publication I introduces a new methodology for value portfolio selection employing Finnish data. The results show that adjusting conventional valuation ratios for firm size, industry classification, and financial leverage, and combining them as composite selection criteria can add value to equity investors. The remaining three publications employ U.S. data. Publication II compares the discriminatory power of a larger number of individual valuation ratios than any earlier study. Publication III serves as a sequel to Publication II by examining the combination strategies with four different MCDM methods. Finally, Publication IV shows new evidence on anomaly interactions and the cross-section of stock returns by employing 5x5 conditional double sorts and Fama and MacBeth (1973) style regressions.

The findings of this thesis are useful for both academics and portfolio practitioners who are interested in enhancing performance of their equity portfolios in terms of raw returns and/or risk-adjusted returns. The overall results give interesting insights to trading opportunities in two different national stock markets and provide many useful implications for both unidimensional, as well as for multidimensional portfolio management.