Quantitative Stock Selection in Japan and the United States

Abstract

Stock selection models have been, and can be, effectively employed in Japan to deliver excess returns. In 1992, in the initial year of this Journal's publication, Guerard and Takano (1992) reported mean-variance efficient portfolios for the Japanese and U.S. equity markets, and show that the use of a regression-weighted composite model of earnings, book value, cash flow, sales, and their relative variables outperformed their respective equity benchmarks by approximately 400 basis points annually. Markowitz and Xu (1994) tested the composite model strategy and found that its excess returns were statistically significant from a variety of models tested, and the composite model strategy was not the result of data mining. In this analysis, the Guerard and Takano stock selection models are updated through 2001 using a similar Japanese-only database. The sophisticated regression model continues to produce the highest information coefficients in Japan and the U.S. We include a consensus analyst derived forecast, revisions, and breadth variable, and show its contribution to stock selection. Several Japanese-only analyst forecasting model results are similar to U.S.-only results. The use of the Global Compustat database allows the construction of global variables that produce similar stock selection models. The effectiveness of these quantitative models has not lessened during the 1992-2003 period.