Profitability of fundamental analysis using a convergence strategy in Korea stock market

Abstract

Fundamental analysis is based on the principle that the stocks have their own intrinsic value, and analysts are able to obtain abnormal returns by arbitrage strategy to buy undervalued stocks and sell overvalued stocks. However, due to the discretion of analysts on the selection of various models and parameters on fundamental analysis, it was difficult to distinguish between analytical ability of analysts and the data snooping. Bartram and Grinblatt (2018) performed fundamental analysis with a statistical approach, which showed to obtain alpha (risk adjusted return). Using Bartram and Grinblatt (2018) methodology, the analysts’ discretion is limited because the parameters of the model that can be selected are limited, and the performance evaluation for the fundamental analysis can be made clearer. This study aims to examine whether the fundamental analysis is working to the Korea stock market with Bartram and Grinblatt (2018) methodology. The fundamental analysis using Bartram and Grinblatt (2018) methodology has resulted in statistically significant abnormal return, and also shown that the Korea stock market is not a semi-strong efficient market.