Can financial ratios predict the Malaysian stock return?

Lee, Chin and Lee, Weng Hong (2008): Can financial ratios predict the Malaysian stock return? Published in: Integration & Dissemination , Vol. 2, (2008): pp. 7-8.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: dividend yield (DY), earning to price ratio (EP), and capital gain (CG), stock market return, Malaysia, Ordinary Least Square (OLS)
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; F - International Economics > F6 - Economic Impacts of Globalization > F65 - Finance; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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