Up the Stairs, Down the Elevator: Valuation Ratios and Shape Predictability in the Distribution of Stock Returns

Using bivariate causality tests, this paper examines price-earnings (PE) and dividend yield (DY) ratios and finds that they do not predict future stock returns but that they do predict future earnings and dividends, lending support to the efficient markets hypothesis.  (JEL: G12, G14)

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Do Valuation (P/E, ROE and P/BV) Ratios Drive Stock Values? A Case of GCC Countries

International Journal of Accounting and Financial Reporting ◽

10.5296/ijafr.v9i2.14848 ◽

2019 ◽

Vol 9 (2) ◽

pp. 362

Author(s):

Arindam Banerjee

Keyword(s):

Stock Returns ◽

United Arab Emirates ◽

Stock Prices ◽

Stock Price ◽

Integrated Approach ◽

Listed Companies ◽

Multiple Regression Model ◽

Gcc Countries ◽

Price Earnings Ratio ◽

Valuation Ratios

Do valuation ratios predict the future stock prices? Over the decades, researchers have explored data across various global financial markets and across different timelines to seek its unique answer. The results though were not universal, resulted in generating greater interest in the subject. Using valuation ratios as a stock price predictor gained further momentum after Campbell and Shiller’s seminal work involving a century of data sets. In spite of its practical relevance, not much effort was being made to establish the correlation between valuation ratios and stock price of GCC listed companies. This paper attempts to bridge the existing gap by studying 140 publicly listed companies in the six GCC countries namely Qatar, Kuwait, Bahrain, Saudi Arabia, Oman and United Arab Emirates (UAE) using the multiple regression model. The period of study was between 2013-2017. Correlation is established for each of the countries individually, followed by an integrated approach. The independent variables used in the study are Price Earnings Ratio (P/E), Return on Equity (ROE), Price to Book Ratio (P/BV) and Stock Returns being the dependent variable.

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Price extremes and asymmetric dependence structures in stock returns: the emerging market evidence

Journal of Economic Studies ◽

10.1108/jes-10-2021-0507 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Saji Thazhungal Govindan Nair

Keyword(s):

Business Cycle ◽

Stock Returns ◽

Extreme Values ◽

Stock Exchange ◽

Emerging Market ◽

Empirical Finding ◽

Content Type ◽

Asymmetric Dependence ◽

News Effects ◽

Valuation Ratios

PurposeEquity research in experimental psychology reveals investors' overreactions to bad news events. This study of asymmetric price structures in equity markets investigates whether such behavior predicts stock returns in an emerging market of India.Design/methodology/approachThe research decomposes Bombay Stock Exchange (BSE) Sensex returns into Extremely Positive Returns (EPR) and Extremely Negative Returns (ENR) based on extreme values at first and then tests their lead–lag relations.FindingsThe empirical finding is consistent with the existing evidence of asymmetric news effects on stock returns in India. In precise, ENR robustly predicts one-month-ahead EPR for the sample period from January 1991 to March 2020. This predictive power persists even in the presence of popular valuation ratios and business cycle variables.Practical implicationsThe paper explains the rationale of extreme value modeling in price forecasting. Investors can find additional utility gains from market cycle information while predicting extreme returns in Indian stock market.Originality/valueThe paper is unique to understand business cycle effects in extreme return reversals in emerging markets.

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Stock Returns and Valuation Ratios at Sector Level in South Africa: The Regime-switch Modelling Approach

Global Business Review ◽

10.1177/0972150920976641 ◽

2020 ◽

pp. 097215092097664

Author(s):

Kudakwashe Joshua Chipunza ◽

Hilary Tinotenda Muguto ◽

Lorraine Muguto ◽

Paul-Francois Muzindutsi

Keyword(s):

Stock Returns ◽

Regime Switching ◽

Stock Exchange ◽

Return Predictability ◽

Stock Return Predictability ◽

Switching Model ◽

Johannesburg Stock Exchange ◽

Market Regime ◽

Markov Regime Switching Model ◽

Valuation Ratios

There is mounting evidence of stock return predictability based on valuation ratios across various stock markets. Most studies in this regard assume that the link between stock returns and valuation ratios is constant and linear. Yet, return predictability may vary according to the prevailing market regime. Accordingly, this study investigated whether the dividend and price-earnings valuation ratios predict returns on six sector indices on the Johannesburg Stock Exchange and whether that predictability is dependent on the prevailing market regime. The study employed a Markov regime-switching model over a sample period spanning from 1996:01 to 2018:12. The results showed that in most sectors, predictability was present, and its significance was dependent on whether the market was in a bullish or bearish regime. These findings are useful to investors who use valuation ratios to predict returns and adjust portfolios in various sectors across different market regimes on the South African market.

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Freedom Indices and Capital Asset Pricing Model: Some Malaysian Evidence

International Journal of Management, Finance and Accounting ◽

10.33093/ijomfa.2020.1.1.1 ◽

2020 ◽

Vol 1 (1) ◽

pp. 1-21

Author(s):

Ying Tay Lee ◽

Devinaga Rasiah ◽

Ming Ming Lai

Keyword(s):

Human Rights ◽

Asset Pricing ◽

Stock Returns ◽

Firm Size ◽

Explanatory Power ◽

Least Square ◽

Press Freedom ◽

Capital Asset Pricing ◽

Capital Asset ◽

Cross Sectional

Human rights and fundamental freedoms such as economic, political, and press freedoms vary widely from country to country. It creates opportunity and risk in investment decisions. Thus, this study is carried out to examine if the explanatory power of the model for capital asset pricing could be improved when these human rights movement indices are included in the model. The sample for this study comprises of 495 stocks listed in Bursa Malaysia, covering the sampling period from 2003 to 2013. The model applied in this study employed the pooled ordinary least square regression estimation. In addition, the robustness of the model is tested by using firm size as a controlled variable. The findings show that market beta as well as the economic and press freedom indices could explain the cross-sectional stock returns of the Malaysian stock market. By controlling the firm size, it adds marginally to the explanation of the extended CAP model which incorporated economic, political, and press freedom indices.

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