Formulating a novel stock selection model using DEA and grey situation decision model

Abstract

Investment in equities is driven mainly by the desire to achieve profits. Adopting a simple and effective approach to stock selection to achieve higher returns is a key concern for investors. This study takes listed companies is Taiwanese electronic component industry as investigative subjects, and examine a study period running form 2001 to 2004, a period during which the Taiwan stock market experienced both bull and bear markets. This choice of study subject and study period helps achieve the objective of his study of providing a reference for individual and institutional investors in making stock-selection decisions by constructing a simpler, more stringent and effective stock selection model. This study assesses relative operating performance using the DEA additive model and relative stock price evaluation by the Grey situation decision model. The evaluation results are then used to further classify listed stocks based on four attributes. Empirical results indicate that the proposed stock selection model can predict stock returns, enabling both institutional and individual investors to reduce the risks associated with equity investments. Results of this study further demonstrate that DEA is combined with Grey situation decision extremely effective in devising stock selection strategy.

Keywords and phrases:

• Stock selection strategy
• data envelopment analysis
• grey situation decision
• relative operating performance
• relative stock price evaluation