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Relative price performance : the theory and an empirical test Hallam, William P.

Abstract

This study has a twofold purpose. The primary purpose is to examine empirically the hypothesis of relative price performance. This hypothesis states that issues in the stock market which have recorded a price performance superior to the market for a period of time will tend to continue to record a superior price performance relative to the market. Conversely, those issues which have recorded an inferior price performance relative to the market will tend to maintain an inferior relative performance. The secondary purpose of the study is to develop a theoretical framework that attempts to explain how complexity in corporations is a constraint on the analysis of those corporations and is a determinant of security price behavior. The data consisted of a sample of 1214 companies which constituted those stocks included in the four major indices on the Toronto Stock Exchange as of January 1, 1965. The data tested were adjusted monthly stock prices covering the period January, 1965 to November, 1969. The methodology employed was the estimation of regression equations to determine the relationship between historical measures of relative price performance and subsequent relative price performances. The results of the empirical testing provide no support for the hypothesis. In practically every regression equation estimated the significance of the findings was almost negligible. The findings inferred that the hypothesis should be rejected. The development of a theoretical framework involving complexity in corporations and information types demonstrated that trends in security price movement are logically possible but only in certain cases. As a consequence of the two purposes of the study two conclusions were arrived at. Firstly, the hypothesis as tested here must be rejected due to an absence of any support for it. Secondly, recognition of the constraining influence of complexity on the security valuation process revealed that certain categories of companies would tend to exhibit a consistency in their securities' relative price performance. Therefore it was suggested that future research in the field of security price behavior should give consideration to disaggregating the sample into categories of complexity.

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