EVIDENCE ON MEANS REVERSION OF SINGAPORE PROPERTY STOCK PRICES TOWARDS THEIR FUNDAMENTAL VALUES - A COINTEGRATION ANALYSIS AND VECTOR ERROR CORRECTION MODEL

Abstract

This study attempts to discover evidence of mean reversion of Singapore property stock prices towards their corporate fundamental values over a ten-year period from June 1989 to June 1999. Earnings per share, dividends per share and net asset value are used as proxies for fundamental value of a property stock. The Johansen's cointegration methodology is implemented to test for the number of cointegrating relationships of earnings per share, dividends per share and net asset value with stock price of 19 Singapore property stocks. Further, a vector error correction model is estimated to determine the significance of each fundamental value and the short-run dynamics of stocks with cointegrating relationships. Likewise, a vector autoregression model is estimated for stocks with no cointegrating relationships. The results reveal, for the 11 of the 19 stocks under study, that stock prices display a long-run equilibrium relationship with one or more of their proxies for fundamental value, which is evidence of mean reversion or convergence behaviour towards the fundamental values. Detailed analyses of which fundamental value or the short-run dynamics for each property stock is more significant is provided which displays the superiority of disaggregate tests. The results reveal that lagged changes in net asset values and earnings (highly sensitive) and the error correction terms are most significant for cointegrating stocks, while for noncointegrating stocks, lagged prices and dividends (highly sensitive) are more significant. Explanations for mean reversion behaviour and implications on investment strategies in terms of fundamental analysis conclude the study.