The Research On Effectiveness Of The PEG Model’s Investment Applied In The Chinese Stock Market

The value investment strategy is widely used in investment practice, and has withstoodthe test of the market. As China’s securities market is still not perfect, many theories cannot beapplied to China’s stock market. As China’s share reform is completed, the influence factorshas changed profound.We should mention both the link between the market prices andfundamentals factors and the stock trend and enterprises’ operational risk. Therefore, theimportance of value investment strategy is gradually appearing. This paper selects the PEGmodel of value investment strategy which is based on the price earnings ratio. The PEGmodel contains the enterprise future earnings growth prospects and make up for the defectmodel of PE. Based on the past theories, we deduce the theoretical model of PEG.We canconclude PEG and stock returns has the negative correlation theoretically.Then,we apply theempirical research to investigate the correlation between PEG and stock returns.Firstly,we analyze the the distribution of PEG,PE and earnings per share growth rate.Secondly, according to the PEG value, the sample data is divided into five groups from smallto large.We investigate the variation of stock returns and risk coefficient along with theincrease of PEG value.We find that stock return of high PEG combination is lower than theone of low PEG combination.But the risk coefficient with the variation of PEG has noobvious variation trend.Thirdly,we introduce the three factor model of Fama-French forcontroling the systemic risk. The results show that, PEG and stock returns are negativecorrelation, and we get the significant regression results. The results are consistent with thedescriptive statistical analysis. Finally, this article further discusses PE and the growth rate ofearnings per share. The results show that, there is no significant trend of stock returns with theincrease of PE ratio.And the situation of the growth rate of earnings per share is the same asPE.This shows that we can’t use the PE or earnings per share growth alone to guide theinvestment.