Combination value investing and momentum investing to stock selection using data envelopment analysis

ABSTRACT: This paper examines the applicability of data envelopment analysis (DEA) as a basis of selection criteria for equity portfolios. In Iran, it is the first DEA application for constructing a combined equity investment strategy that aims to integrate the benefits of both value investing and momentum investing. Efficiency score are calculated by DEA models and then highest score should be in the optimal portfolio. The performance of portfolio is evaluated on the basis of the average return and several risk-adjusted performance metrics throughout the 2001-2010 sample periods.The result shows the capability of the DEA approach to add value to equity portfolio selection. The outperformance is slightly more significant when the stock price momentum is included in the DEA variables. DEA is particularly useful as a multi-criteria methodology in cases in which the number of stock in the sample is large.