The aim of this study is to investigate the possibility to improve the investment model defined in Piotroski and the subsequent research carried out on this model. Our model builds further upon the original fundamental score put forth by Piotroski.
This further developed model is tested in two different contexts; firstly, a weighted fundamental score is developed that is updated every year in order to control for any changes in the predictive ability of fundamental signals over time.
Secondly, the behavior of this score is analyzed in context of recession and growth cycles of the macro economy. Our findings show that high book-to-market portfolio consist of poor performing firms, as shown by Fama and French and is thereby outperformed by both Piotroski’s F_score and our own developed scores.
The score based on a rolling window correlation is performing a little better then F_score, but the score based on correlations for prior Up and Down periods is not. The conclusions we draw from the results are that improvements have to be made, both to F_score and our own developments, to sort winners from loser to get an even more profitable zero-investment hedge strategy.
Source: Uppsala University
Author: Eliasson, Martin | Malik, Khawar | Österlund, Benjamin