Empirical analyses of the 'Dogs of the Dow' strategy: Hong Kong evidence.

AuthorQiu, Mingyue

    The Dogs of the Dow investment strategy, also known as the Dow 10 strategy, is a very popular investment strategy in the United States. This strategy involves investing equal amounts in the 10 highest-yielding stocks of the Dow Jones Industrial Average (DJIA) index (commonly referred to as Dogs of the Dow) at the end of the year and holding these stocks for one year. After the year, the portfolio is rebalanced and updated with equally weighted investments in the new Dogs of the Dow. One of the first papers on the Dogs of the Dow strategy was written by John Slatter, who showed that the 10 highest-dividend-yielding stocks of the DJIA outperformed the DJIA from 1973 to 1988 (Slatter, 1988). Since then, there were a lot of investors and scholars starting to apply and study the strategy. Their results showed that the Dogs of the Dow strategy was effective in the American stock market.

    In addition to the United States, scholars in many other countries have examined the strategy. Visscher and Filbeck (2003) showed that the Dogs of the Dow investment strategy performed well against the Toronto 35 and TSE 300 indices in the Canadian stock market (Visscher and Filbeck, 2003). The strategy was also widely examined in Latin American and Polish stock markets (Andre and Silva, 2001; Brzeszczynski and Gajdka, 2008). Further, Rinne and Vahamaa (2011) concluded that the Dogs of the Dow investment strategy can be successfully applied to the Finnish stock market (Rinne and Vahamaa, 2011). In Japan, Qiu et al. proposed applying the Dogs of the Dow strategy to the Tokyo Stock Exchange and concluded that it had a good performance when it was applied in NIKKEI 225 for the 1981 -2010 data (Qiu et al., 2011).

    Our purpose is to analyze the performance of the Dogs of the Dow strategy in Hong Kong stock market. We conduct a simulation for the 2001 -2011 data and compare the performance of Dogs of the Dow strategy with that of the market index. Further, in addition to the most popular version of the Dogs of the Dow strategy, which uses the 10 highest-dividend-yielding stocks, we also test less well-known version of the strategy which involves fewer Dogs.

    The remainder of this paper proceeds as follows: In the next section, we focus on the simulation process. Section 3 presents results of the annual return and accumulated performance of both the Dogs of the Dow strategy and the Hang Seng index. We also compare them at 5-year subperiods. In Section 4, we test the performance of the Dogs of the Dow...

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