An empirical study on the relevance of applying relative valuation models to investment strategies in the Japanese stock market

Abstract

In this study, we empirically investigate the relevance of relative valuation models in the Japanese stock market. Using various multiples such as price earnings ratio (PER), price book value ratio (PBR), price sales ratio (PSR), and price cash flow ratio (PCR), we study which valuation model is the best in forecasting stock prices, and in identifying portfolios which generate higher returns. We find that in terms of prediction accuracy, PBR is the best, while in portfolio selection results vary across the industry.