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Can financial ratios predict the Malaysian stock return?

Author

Listed:
  • Lee, Chin
  • Lee, Weng Hong

Abstract

The purpose of this paper is to use the dividend yield (DY), earning to price ratio (EP), and capital gain (CG) to predict the Malaysia stock market return from 1995 to 2005 by using the time series regression. We utilize both the univariate and multivariate Ordinary Least Square (OLS) regression analysis to test the future monthly and quarterly stock return. We apply the unit root test to test the stationary of the time series, and various diagnostic tests to check for the robustness of model. We find that the financial ratios and the capital gain have a positive relationship with expected monthly and quarterly stock return. Although not all the model show significant relationship between the financial ratios and stock return, it is proven that the financial ratios and capital gain have some predictive power to predict the Malaysia future stock return. From the overall findings, we can suggest that both the univariatre DY with dummy variable and multivariate DY model with dummy variable are the good models to predict the Malaysia monthly and quarterly future nominal stock return.

Suggested Citation

  • Lee, Chin & Lee, Weng Hong, 2008. "Can financial ratios predict the Malaysian stock return?," MPRA Paper 59170, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59170
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    File URL: https://mpra.ub.uni-muenchen.de/59170/1/MPRA_paper_59170.pdf
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    References listed on IDEAS

    as
    1. Lau, Sie Ting & Lee, Chee Tong & McInish, Thomas H., 2002. "Stock returns and beta, firms size, E/P, CF/P, book-to-market, and sales growth: evidence from Singapore and Malaysia," Journal of Multinational Financial Management, Elsevier, vol. 12(3), pages 207-222, July.
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    Cited by:

    1. Jasman Tuyon & Zamri Ahmad, 2018. "Behavioural Asset Pricing Determinants in a Factor and Style Investing Framework," Capital Markets Review, Malaysian Finance Association, vol. 26(2), pages 32-52.

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    More about this item

    Keywords

    dividend yield (DY); earning to price ratio (EP); and capital gain (CG); stock market return; Malaysia; Ordinary Least Square (OLS);
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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