|
|
| Volume 6, No. 1,
April 2007 |
|
|
Expected P/E, Residual P/E, and
Stock Return Reversal: Time-Varying Fundamentals or Investor
Overreaction? |
|
|
| Ying Huang |
|
|
School of Business, Manhattan
College, U.S.A. |
| Chia-Hui Tsai |
|
|
First Taisec Capital
Management, Taiwan |
| Carl R. Chen |
|
|
Department of Economics and
Finance, University of Dayton, U.S.A. |
|
|
| Abstract |
|
|
|
|
We decompose P/E ratios into a
fundamental component and a residual component that cannot be
explained by the firm or economic fundamentals. Purging the
fundamental component from observed P/E ratios, we find that
portfolios based on residual P/E ratios exhibit performance reversal
only in overbid glamour stocks; hence over-optimism is more
prevalent than over-pessimism. |
|
|
|
Key words:
P/E ratios; overreaction; market efficiency |
| JEL
classification:
G30 |
|
|
Back |