Summary
This study examines the predicability of stock returns in the 12 emerging stock markets by using price-earnings ratio, dividend yield, and market-to-book ratio as predictive variables during the period of 1997-2003. We analyse the predicability by deriving a new index value using the proper combination of these predictive variables and multi-regression models. We find that the predictability of stock returns in the emerging markets is variant. The market-to-book ratio stands to reveal significant results in terms of predicting stock returns for a one-year period among others for most of the emerging market countries. The dividend yield comes in at second place. The results of the validation tests also show that the forecasting power of the estimated model is fairly good. Finally, these evidences support the individual predictive power of some, but not all financial variables in the stock market. This causes much discussion on the effectiveness of the stock market.
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Extract
Price-Earnings Ratio, Dividend Yield, and Market-to-Book Ratio to Predict Return On Stock Market: Evidence From the Emerging Markets
INTRODUCTION
Economists and financial practitioners have sought to identify variables that predict stock returns in the market for the last two decades. They have looked at various metrics as future predictors of share price performance. They have found size, interest rate, beta, market-to-book ratio (MtB), price-earnings ratio (PfE), and dividend yield (DY) to be rather good indicators among many others.The aim of this study is to examine the ability of the MtB, P/E, and DY to forecast market returns in an integrated form. The use of MtB is motivated by the findings of Fama and French (1992) that shows the MtB ratio of individual stocks has the ability to explain cross-sectional variation in stock returns. We have also included a dividend and earning yield measure as independent variables in our estimation. Intuitively, P/E ratio, MtB ratio, and the DY could be viewed as a multiple that the market attaches to earnings, book value and dividend respectively. In determining market prices and earnings, book value and dividend would be useful for predicting the behaviour of future ...See the full content of this document
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