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The Causality Relationship between Financial Market Indexes and Financial Ratios: Evidence from Amman Stock Exchange

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  • Ghaith N. Al-Eitan
  • Nofan Hamed Al Oleemat

Abstract

This study examines the effect of financial ratios on financial indexes. For this purpose, the financial indexes of ASE are examined. In the study, the relation between financial indexes performance and financial ratios are analyzed by time series data. In the analysis 4 financial indexes between 2010 and 2014 have been analyzed. The dependent variable of the study is financial indexes; the independent variables are financial ratios. This study contributes to the body of knowledge by estimating the presence and nature of theses causal associations. The results of Granger causality test revealed that the financial ratios have causal relationship with the performance of ASE indexes. Based on the analysis, the results showed that financial ratios (P/E, P/BV and DIV/YIELD) significantly caused financial indexes performance. The Johansen Cointegration test shows long run relationship among the variables. Some policy implications and recommendations are drawn in the conclusion for policy makers.

Suggested Citation

  • Ghaith N. Al-Eitan & Nofan Hamed Al Oleemat, 2015. "The Causality Relationship between Financial Market Indexes and Financial Ratios: Evidence from Amman Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 5(2), pages 23-31, April.
    • Handle: RePEc:hur:ijaraf:v:5:y:2015:i:2:p:23-31
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    References listed on IDEAS

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    1. Pierre Rostan & Alexandra Rostan, 2012. "Assessing the Predictive Power of Customer Satisfaction for Financial and Market Performances: Price-to-Earnings Ratio is a Better Predictor Overall," International Review of Management and Marketing, Econjournals, vol. 2(1), pages 59-74.
    2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    3. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, vol. 74(2), pages 209-235, November.
    4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Cited by:

    1. Sufian Radwan Al-Manaseer, 2020. "Impact of Market Ratios on the Stock Prices: Evidence from Jordan," International Business Research, Canadian Center of Science and Education, vol. 13(4), pages 1-92, April.

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