Open AccessMeasuring Stock Market Predictability with Implications of Financial Ratios: An Empirical Investigation of Pakistan Stock Market
Author(s) -
Abdul Samad Shaikh,
Muhammad Kashif,
Sadia Shaikh
Publication year - 2020
Publication title -
journal of business strategies (karachi)
Language(s) - English
Resource type - Journals
eISSN - 2521-2540
pISSN - 1993-5765
DOI - 10.29270/jbs.12.2(2018).0118
Subject(s) - predictability , economics , econometrics , stock market , financial economics , capital asset pricing model , stock exchange , stock (firearms) , predictive power , financial ratio , dividend yield , finance , dividend policy , mathematics , statistics , mechanical engineering , paleontology , philosophy , horse , epistemology , engineering , biology
This paper investigates the financial ratios prediction on Stock Market Returns for Pakistan Stock Exchange. The research includes three financial ratios; Dividend Yield (DY), Earning Yield Ratio (EYR) and Book-to-Market Ratio (B/M); that have been observed through past researchers as predictors of Stock Market Returns. The theoretical framework is based on Arbitrage Pricing Theory and Capital Asset Pricing Model CAPM by Roll and Ross (1977) and Fama-French 3 factor (1992). Generalized Least Squares (GLS) is applied to estimate the predictive regressions, Cointegration runs are applied to evaluate the long-term relationship, and Generalized Methods of Moments (GMM) to measure the moments over the years and fluctuations in stock returns. The study results show financial ratios as strong predictor of stock return in Pakistan Stock Exchange, the GMM analyses reveal that the EYR has the higher predictive power than DY and B/M respectively. Furthermore, it is found that the financial ratios predictability is enhanced when ratios are combined in the multiple predictive regression models. The research findings are useful for the stock market investors to evaluate their decisions and for academic researchers to evaluate the stock market and investment predictability.