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- Title
Market Inefficiencies and Pricing Heuristics: Evidence from the PEG Ratio.
- Authors
Fafatas, Stephan; Shane, Phil
- Abstract
This study investigates the use of a simple trading heuristic, the PEG ratio, to value stocks. Our results indicate that a trading strategy implementing accounting-based intrinsic value calculations yields greater one-year stock returns for a subsample of firms priced fairly according to the PEG as compared to returns from the same strategy applied to the overall market. Thus, identifying stocks priced according to the PEG heuristic creates a sample of firms which are more likely to have fundamental values that diverge from actual stock prices. These results provide preliminary evidence regarding the relationship between heuristics and market inefficiencies. Investors can profit by applying intrinsic value-based trading strategies to stocks currently priced in accordance with the PEG.
- Publication
Journal of Financial & Economic Practice, 2011, Vol 11, Issue 1, p69
- ISSN
1937-6820
- Publication type
Academic Journal