Mean reverting properties of price-to-fundamental ratios.

We investigate the mean reversion characteristic of three price multiplies, the Price-Earnings ratio, Price-to-Book ratio and the Price-to-Sales ratio, for five Asian countries: Singapore, Japan, Korea, Indonesia and Malaysia. We find significant mean reversion for the PE and PB ratio over a short term horizon of one year. This mean reversion of PE and PS appears to be attributable to growth in earnings and sales respectively rather than market returns. The results are mixed for the PB ratio. As such, investors who rely on PE and PS in their investments should separate the returns component and the growth component when analyzing these ratios. When these ratios are higher than historical average, it is more likely to be an expectation of higher further growth than an overvaluation. Hence we conclude that the information embedded in these ratios is profitable in cases where investor’s expectation differs from market’s consensu