Date of Publication

8-2016

Document Type

Bachelor's Thesis

Degree Name

Bachelor of Science in Management of Financial Institutions

Subject Categories

Finance

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Thesis Adviser

Alfredo Santoyo

Defense Panel Chair

Tyrone Chan Pao

Defense Panel Member

Kristine Mae Lagdameo
Ferdinand Basallo

Abstract/Summary

The proponents of the paper investigate the existence of stock mispricing in the Philippine stock market, examine its relation to arbitrage risk, and explore its practical implications regarding investment portfolio construction. Two mispricing measures are constructed to measure price deviations: first is based on relative valuation and excess valuation second is based on residual income valuation. After establishing the presence of mispricing, multiple regression tests are conducted to see the relationship between mispricing and arbitrage risk. More than the market factor (beta) from the capital asset pricing model (CAPM), the application of the Fama-French 3-factor and 4-factor model allowed for other stock return determinants to be taken into account specifically size, value and momentum.

Through univariate test, findings demonstrated the existence of price deviations in the market. Mutlivariate results, on the other hand, showed the direct relationship between arbitrage risk and stock mispricing. it was also proven that the book-to-market (BM) ratio is a weaker indicator of mispricing - which is consistent with the results of Doukas, Kim and Pantzalis (2010), and is contradictory with the results of Ali, Hwang and Trombley (2003). Furthermore, a different multiple regression test on the Fama-French models indicated that, excluding the factor of size, the variables of market, value and momentum are all statistically significant at conventional levels-- indicating that they are stock returns determinants. Summarily, these results imply that greater mispriced stocks exhibit higher arbitrage risk and therefore, have higher excess returns and hence, in line with the theory that the existence of mispricing is brought by the failure of investors to hedge arbitrage risk, particularly idiosyncratic risk. Therefore, with premium as compensation, the found relationship between stock return and arbitrage risk provides another practical avenue for practitioners to engineer and monitor their investment portfolios.

Abstract Format

html

Language

English

Accession Number

TU22253; CDTU022253

Shelf Location

Archives, The Learning Commons, 12F, Henry Sy Sr. Hall

Physical Description

108, 4 leaves, illustrations (some color)

Keywords

Stocks—Prices—Philippines; Arbitrage—Philippines

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Embargo Period

5-4-2021

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