Alternative Alpha Seeking Strategy with EVA Long-Short: Evidence from the Korean Stock Market*

Abstract

Economic value added (EVA) is a useful concept for creating investment strategies for fund managers and scholars. This paper analyzes an alpha-seeking strategy with EVA. We use a long-short portfolio with high EVA and low EVA stocks. Using the normalized EVA, we construct a portfolio from the first to the fifth quintile and test the effectiveness of the strategy with the Carhart four-factor model. We find the following: (1) The portfolios with high EVA stocks outperform those with low ones; (2) EVA-based long-short portfolio generates 6.5% return per annum. This paper provides an empirical basis for launching a new equity fund with EVA in Korea. This strategy suggestion could also be extended to introduce new EVA investment strategies in other global markets.