This course covers two of the seven trading strategies that work in emerging markets. The seven include strategies based on momentum, momentum crashes, price reversal, persistence of earnings, quality of earnings, underlying business growth, behavioral biases and textual analysis of business reports about the company. In the first part of the course, you will learn how to read an academic paper. What parts to pay attention to and what parts to skim through will be discussed here. For every strategy, first you will be introduced to the original research and then how to implement the strategy. The first strategy, Piotroski F -score will be discussed in detail. You will be taught how to calculate the F - Score and how to use this score in a strategy. This is followed by the next strategy, Post earnings announcement drift (PEAD).
Piotroski F-Score : Implementation - a
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來自 Indian School of Business 的課程
Trading Algorithms
233 個評分
從本節課中
Module 3 - Trading Strategy 1 - F Score
After completing this module you will understand the Piotroski F Score Strategy and the economic intuition behind it. You also be able to implement the trading strategy.
與講師見面
Prasanna TantriSenior Associate Director
Center for Analytical Finance
[MUSIC]
Learning outcomes, after watching this video,
you will understand how to implement the Piotroski F-Score in real life.
[MUSIC]
All right, where are we now?
We understood basics of accounting.
We have done a little bit of basics of markets.
We have seen how to read a paper.
Structure of a paper.
What part is important for us.
We have seen how to pick up that algorithm part.
How to understand where the data comes from.
And we also picked up this Piotroski paper and
actually constructed Piotroski Score that's where we are right now.
So we have f score, which is Piotroski score ranging from 1 to 9.
So quickly, it's time you can pause and think about construction of the score.
So what are the profitability measures, capital structure measure, and
efficiency measures.
So, 4 plus 3 plus 2 which constitute Piotroski score.
You can quickly recap.
And now, you should be in a position given a balance sheet, given a forms, details.
You should be able to construct Piotroski score for all forms for
which you have this data.
Of course, you know what the data requirement is.
So, you need to have profitability information, leverage,
sales, so on, and so forth.
So, that's where you are right now.
Now, what do you do with this score?
Go back to what we said in the abstract.
So, we said two things we said a buy-and-hold
strategy which buys these stocks and holds,
thus, approximately 7% more than renewals of IBM stocks.
In other words, if you just buy all IBM stocks and hold on.
If we make x percent, here you will x plus 7%.
You would have done.
I'm not saying you will do.
You will do is not right.
You may not be able to do.
So that disclaimer always applies, every sentence I say comes with that disclaimer.
It's about past and likelihood of things working out in the future.
Not certainty of things happening in the future.
Coming back, so if you just buy and hold a stock,
or buy and hold Piotroski portfolio of stocks which score really high.
By the way, high Piotroski score means fundamentally,
relatively sound companies among this high iBM stocks.
Low scores mean fundamentally relatively not so strong companies.
Now if you buy this strong company then hold,
you are likely to outperform the by 7%.
Now what's wrong with just buying and holding?
Nothing's wrong per se but what is the, is there a possibility of you losing money?
If you just have buys, yes.
There is always a possibility of you losing money in stocks.
But if you just do a buy and
hold strategy, what if the entire market goes down?
Piotroskis claim is not that even if the market goes down,
these stocks will make money.
No, no, that is not the claim.
Underline the word outperform, that's critical here.
All that he's saying is if the IBM renewals earns X percent,
this particular portfolio of high f score forms have done X plus seven.
So that X could be negative.
What if the entire portfolio does minus 30%?
Then, what Piotroski shows is his portfolio does minus 23%.
Can we do better?
Yes, that's what Piotroski suggests.
What we can do is that we can create a long short portfolio.
But what is this long short portfolio?
Go back to your basics on markets module.
Long is buying, short is selling without buying.
So when you combine longs and shorts, that becomes a long short portfolio.
Now the question is what to long and what to short?
Or what to buy or what to sell, that's the basic question in trading, right?
At the end of the day the purpose of all these
exercise is to come out with stocks to buy and
stocks to sell that's the goal.
Now here, there is no pre-determined rule for this.
So Piotroski also tries various combinations.
So as a starting point, just think about this.
A firm which is coding nine out of nine, what kind of firm is this?
This is a firm with high return on assets.
You should be able to tell all the nine by now.
This is a form which has a positive change in internal assets.
This a form which has positive cash flows.
This is a form with low accruals.
The form actually has high operating performance.
Capital section is fine.
It has not raised equally in the recent past.
Leverage is actually going down.
Asset turn over is high and so on and so forth.
And yet the most important part to know yet
this such a firm is falling in the category of high book to market farms.
See if you go to the other half which is low book to market firms you will find
any number of firms satisfying these nine characteristics.
They are good firms, by definition, they are good firms,
they satisfy these characteristics, and their valuation is also high.
So nothing surprising, you may not be able to, all of these may be priced in, so
by buying them, you may not be able to make money.
This is a fresh strategy that deals with them.
We'll talk about it later.
But the point is, the firm of scoring nine
is a firm with all these good qualities, doing well on profitability front,
doing well on operational performance front, doing well on capital sector front,
and yet finds itself in the universe of high book to market firms.
That means market hasn't valued it.
Or positively, or highly, although the fundamental performance looks decent.
Or the more important this, all those delta characteristics.
Clearly, please pay some attention on the delta.
What does delta characteristics mean?
These matrix and all these ROA or cash flow, they are all improving.
That's what these characteristics are indicating.
So these forms are not really having positive fundamentals.
Their fundamentals are turning for better.
So definitely, firms scoring nine should be on your list of buys.
Now that's easy.
Now, what about sell?
Now, using the same argument, what are these firms which score zero?
Think of a firm that is scoring zero in the Piotroski matrix.
Now, this is a firm with extremely low profitability.
They may be losing money more importantly, profitability is declining,
operating performance is declining, and capital structure position is precarious.
That is the reason why it gets a score of zero, and
it finds itself in high book to market firm category.
Now here market has identified the fundamentals of the form correctly.
Such a form returns such bad fundamentals, if you will.
Finding itself in this high book to market individuals should not be a surprise.
Now, you can also think that consider the dangers
of investing in all high book-to-market firms.
If you just pick all high book-to-market firms, you will also be picking up
these stocks which are scoring zero on the Piotroski scale.
No, no the score of 0 in Piotroski scale itself doesn't mean anything.
What it means is these are forms which bad fundamentals, declining fundamentals,
declining operating performance, high terms are going bankrupt which are there.
Which are a part of high book to market universe.
So it's important that you distinguish between these top quality and
bottom quality firms.
So as a starting point what you can do is buy those stocks
which score nine and sell those stocks which score zero.
Now, is there a huge difference between nine and eight?
Now this is a quality to judgment.
Whatever forms which out of eight, they are also good.
Eight out of nine parameters, they've done well.
It's possible that one of the parameters, it slipped because of some reason.
So it's not a bad idea to actually include both nine and
eight in your list of longs.
And similar on the same argument the company which has scored one out of nine.
It's possible that by luck some one of the factors it has done well.
So you can go short on that, zero and one.
So another strategy could be go short on nine and eight,
and go long on zero and one.
Now, where exactly to stop?
Can you do seven, eight, nine?
Zero, one, two?
Or can we do six, seven, eight, nine, zero, one, two, three, four?
This is a judgment call.
And it crucially depends on the institutional set up in the country.
So I would recommend that you start with the strictest definition,
which is nine and zero.
And maybe you go up to nine, eight and zero, one.
And see the results yourself and then think of changing your strategy.
Because by doing so
you will be going long on high quality firms going short on low quality firms.
So why am I asking you to also consider eight because very few firms are nine.
Please remember, you are talking about high book to market renewals.
These are stocks where alude very, very low.
So unless we assume that Westerners in general misjudge a lot of stocks.
It's unlikely that a lot of firms will get a score of nine.
So you may not have enough stocks to trade.
Remember this, why are they valued low?
These are firms with low analyst coverage,
low liquidity, high chances of bankruptcy as well.
So analysts generally don't follow them as much and
that is why marketers neglected them.
So now coming back, pick up this nine, eight and zero,
one firms and start trading.
What do I mean by start trading?
How do we trade?
When do we trade?
When do we buy?
How long to hold?
So that's what we'll analyze next.
