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ANALYSIS AND FORECASTABILITY OF MARKET MODEL: EVIDENCE FROM PAKISTANI MARKET INDEX AND EMERGING MARKET INDEX
Corresponding Author(s) : Fauzia Mubarik
Humanities & Social Sciences Reviews,
Vol. 9 No. 3 (2021): May
Abstract
Purpose of the Study: This study examines and analyzes the influence of the Market Model on the Market Level Return (KSE-100 index) and the Emerging Market Level Return (MSCI Index).
Methodology: The study has employed the sample data of the companies’ representatives of the Oil and Gas Sector of Pakistan from July 2001 to June 2018 respectively. For estimation, the Panel Regression techniques are employed followed by the Forecast Error Statistics for the in-sample forecast ability of the variables under study.
Main Findings: The results of the study depict that the Market Model comprising of the Market Value Financial Ratios strongly influences the returns of the Emerging Market Index relative to the Market Level Return respectively. Similarly, the predictive power of the Market Model is more influential at the Emerging Market Level Return but not less at Market Level Return.
Application of the Study: The findings of the study suggest that the domestic and foreign investors may consider the Market Value Financial Ratios for the valuation and estimation of asset prices. Moreover, the local authorities may take robust steps to continuously reforms in the Energy Mix policy to enhance local as well as foreign investment.
Novelty/Originality of this study: The prime novelty of the study is to analyze the market model based on Market Value Financial Ratios to forecast the Market Level Return and Emerging Market Index Returns using three standard symmetric measures; root mean square error (RMSE), the mean absolute error (MAE), the mean absolute percentage error (MAPE) and the Theil inequality coefficient (TIC) respectively.
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- Anandasayanan, S. (2018). Stock return predictability with financial ratios: An empirical study of listed manufacturing companies in Sri Lanka. International Journal of Accounting and Financial Reporting, 8(4). 471-481. https://doi.org/10.5296/ijafr.v8i4.14137 DOI: https://doi.org/10.5296/ijafr.v8i4.14137
- Ademmer, M., & Boysen-Hogrefe, J. (2019). The impact of forecast errors on fiscal planning and debt accumulation (No. 2123). Kiel Working Paper.
- Akhtar, T. (2021). Market multiples and stock returns among emerging and developed financial markets. Borsa Istanbul Review, 21(1), 44-56. https://doi.org/10.1016/j.bir.2020.07.001 DOI: https://doi.org/10.1016/j.bir.2020.07.001
- Aono, K., & Iwaisako, T. (2011). Forecasting Japanese stock returns with financial ratios and other variables. Asia-Pacific Financial Markets, 18(4), 373-384. https://doi.org/10.1007/s10690-010-9135-z DOI: https://doi.org/10.1007/s10690-010-9135-z
- Awartani, B., & Corradi, V. (2005). Predicting the volatility of the S&P500 stock index via GARCH Models: The role of asymmetries. International Journal of Forecasting, 21, 167-183. https://doi.org/10.1016/j.ij forecast.2004.08.003 DOI: https://doi.org/10.1016/j.ijforecast.2004.08.003
- Aydoğan, K., & Gürsoy, G. (2000). P/E and price-to-book ratio as predictors of stock returns in emerging equity markets. Emerging Markets Quarterly, 4(4), 1-18.
- Basu, S. (1977) Investment Performance of Common Stocks in Relation to their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis. The Journal of Finance, 32(3), 663-682. https://doi.org/10.1111/j.1540-6261.1977.tb01979.x DOI: https://doi.org/10.1111/j.1540-6261.1977.tb01979.x
- Caldeira, J. F., Gupta, R., & Torrent, H. S. (2020). Forecasting U.S. Aggregate Stock Market Excess Return: Do Functional Data Analysis Add Economic Value? Mathematics, 8(11), 2042. https://doi.org/10.33 90/math8112042 DOI: https://doi.org/10.3390/math8112042
- Chipunza, K. J., Muguto, H. T., Muguto, L., & Muzindutsi, P. F. (2020). Return predictability and valuation ratios: sector-level evidence on the Johannesburg stock exchange. Cogent Economics & Finance, 8(1), 1817252. https://doi.org/10.1080/23322039.2020.1817252 DOI: https://doi.org/10.1080/23322039.2020.1817252
- Clark, T. E., McCracken, M. W., & Mertens, E. (2020). Modeling time-varying uncertainty of multiple-horizon forecast errors. Review of Economics and Statistics, 102(1), 17-33. https://doi.org/10.1162/rest_a_00809 DOI: https://doi.org/10.1162/rest_a_00809
- Din, W. U. (2017). Stock return predictability with financial ratios: Evidence from PSX 100 index companies, International Journal of Basic Sciences and Applied Research, 6(3), 269-280. https://doi.org/10.2139/ssr n.3077890 DOI: https://doi.org/10.2139/ssrn.3077890
- Eitan, G. N.A.,& Oleemat, N. H. A.(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, 5(2), 23-31. https://doi.org/10.6007/IJARAFMS/v5-i2/1559 DOI: https://doi.org/10.6007/IJARAFMS/v5-i2/1559
- Emamgholipour, M., Pouraghajan, A., Tabari, N. A. Y., Haghparast, M., & Shirsavar, A. A. A. (2013). The effects of performance evaluation market ratios on the stock return: Evidence from the Tehran stock exchange. International Research Journal of Applied and Basic Sciences, 4(3), 696-703. https://doi.org/10.5539/i jef.v4n7p41 DOI: https://doi.org/10.5539/ijef.v4n7p41
- Levy, R. A. (1967). The theory of random walks: A survey of findings. The American Economist, 11(2), 34-48. https://doi.org/10.1177/056943456701100205 DOI: https://doi.org/10.1177/056943456701100205
- Maxwell, O.O., & Kehinde, E.F. (2012). Testing the Relationship between Price to Earings Ratio and Stock Returns in the Nigerian Stock Exchange Market. International Journal of Accounting, Finance & Economics Perspectives, 1(1).
- Mallikarjuna, M., & Rao, R. P. (2019). Evaluation of forecasting methods from selected stock market returns. Financial Innovation, 5(1), 1-16. https://doi.org/10.1186/s40854-019-0157-x DOI: https://doi.org/10.1186/s40854-019-0157-x
- Mirfakhr, S.H., Dehavi, H.D., Zarezadeh, E., Armesh, H., Manafi, M.,& Zraezadehand, S.(2011). Fitting the Relationship between Financial Variables and Stock Price through Fuzzy Regression Case study: Iran Khodro Company. International Journal of Business and Social Science, 2(11), 140-146.
- McMillan, D. G. (2021). Forecasting US stock returns. The European Journal of Finance, 27(1-2), 86-109. https://doi.org/10.1080/1351847X.2020.1719175 DOI: https://doi.org/10.1080/1351847X.2020.1719175
- Musallam, S. R. (2018). Exploring the relationship between financial ratios and market stock returns. Eurasian Journal of Business and Economics, 11(21), 101-116. https://doi.org/10.17015/ejbe.2018.021.06 DOI: https://doi.org/10.17015/ejbe.2018.021.06
- Oxana L. Wieland (2015). Modern Financial Markets and the Complexity of Financial Innovation. Universal Journal of Accounting and Finance, 3(3), 117 - 125. https://doi.org/10.13189/ujaf.2015.030303 DOI: https://doi.org/10.13189/ujaf.2015.030303
- Paddrik, M. E., & Tompaidis, S. (2019). Market-Making Costs and Liquidity: Evidence from CDS Markets. Working Paper, Financial Research. https://doi.org/10.2139/ssrn.3351401 DOI: https://doi.org/10.2139/ssrn.3351401
- Pan, Z., Pettenuzzo, D., & Wang, Y. (2020). Forecasting stock returns: A predictor-constrained approach. Journal of Empirical Finance, 55(C), 200-217. https://doi.org/10.1016/j.jempfin.2019.11.008 DOI: https://doi.org/10.1016/j.jempfin.2019.11.008
- Rapach, D., & Zhou, G. (2013). Forecasting stock returns. In Handbook of economic forecasting (Vol. 2, pp. 328-383). Elsevier. https://doi.org/10.1016/B978-0-444-53683-9.00006-2 DOI: https://doi.org/10.1016/B978-0-444-53683-9.00006-2
- San Ong, T., Yichen, Y. N., & Teh, B. H. (2010). Can high price earnings ratio act as an indicator of the coming bear market in the Malaysia?. International Journal of Business and Social Science, 1(1), 194-213.
- Surya, s., & Hasbi, h. (2015). The effect of capital structure profitability and market ratios on stock price in the property sector. Sci. Int. (Lahore), 27(6), 6273-6277.
- Tao, R., & Brooks, C. (2019). Python Guide to Accompany Introductory Econometrics for Finance. Cambridge University. https://doi.org/10.2139/ssrn.3475303 DOI: https://doi.org/10.2139/ssrn.3475303
- Vuolteenaho, T. (2000). Understanding the aggregate market-to-book ratio. In Department of Economics, Harvard University Working Paper. https://doi.org/10.2139/ssrn.161911 DOI: https://doi.org/10.2139/ssrn.161911
- Vuolteenaho, T. (2002). What drives firm level stock returns?. The Journal of Finance, 57(1), 233-264. https://doi.org/10.1111/1540-6261.00421 DOI: https://doi.org/10.1111/1540-6261.00421
- Wieland, O. L. (2015). Modern financial markets and the complexity of financial innovation. Universal Journal of Accounting and Finance, 3(3), 117–125. https://doi.org/10.13189/ujaf.2015.030303 DOI: https://doi.org/10.13189/ujaf.2015.030303
- Wijaya, J. A. (2015). The effect of financial ratios toward stock returns among Indonesian manufacturing companies. IBuss Management, 3(2).261-271.
- Wijesundera, A. A. V. I., Weerasinghe, D. A. S., Krishna, T. P. C. R., Gunawardena, M. M. D., & Peiris, H. R. I. (2015). Predictability of stock returns using financial ratios: Empirical evidence from Colombo Stock Exchange. Kelaniya Journal of Management, 4(2), 44-55. https://doi.org/10.4038/kjm.v4i2.7500 DOI: https://doi.org/10.4038/kjm.v4i2.7500
- Zeytinoglu, E., Akarim, Y.D.,& Çelik, S. (2012). The Impact of Market-Based Ratios on Stock Returns: The Evidence from Insurance Sector in Turkey. International Research Journal of Finance and Economics, 84(C), 41-48.
References
Anandasayanan, S. (2018). Stock return predictability with financial ratios: An empirical study of listed manufacturing companies in Sri Lanka. International Journal of Accounting and Financial Reporting, 8(4). 471-481. https://doi.org/10.5296/ijafr.v8i4.14137 DOI: https://doi.org/10.5296/ijafr.v8i4.14137
Ademmer, M., & Boysen-Hogrefe, J. (2019). The impact of forecast errors on fiscal planning and debt accumulation (No. 2123). Kiel Working Paper.
Akhtar, T. (2021). Market multiples and stock returns among emerging and developed financial markets. Borsa Istanbul Review, 21(1), 44-56. https://doi.org/10.1016/j.bir.2020.07.001 DOI: https://doi.org/10.1016/j.bir.2020.07.001
Aono, K., & Iwaisako, T. (2011). Forecasting Japanese stock returns with financial ratios and other variables. Asia-Pacific Financial Markets, 18(4), 373-384. https://doi.org/10.1007/s10690-010-9135-z DOI: https://doi.org/10.1007/s10690-010-9135-z
Awartani, B., & Corradi, V. (2005). Predicting the volatility of the S&P500 stock index via GARCH Models: The role of asymmetries. International Journal of Forecasting, 21, 167-183. https://doi.org/10.1016/j.ij forecast.2004.08.003 DOI: https://doi.org/10.1016/j.ijforecast.2004.08.003
Aydoğan, K., & Gürsoy, G. (2000). P/E and price-to-book ratio as predictors of stock returns in emerging equity markets. Emerging Markets Quarterly, 4(4), 1-18.
Basu, S. (1977) Investment Performance of Common Stocks in Relation to their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis. The Journal of Finance, 32(3), 663-682. https://doi.org/10.1111/j.1540-6261.1977.tb01979.x DOI: https://doi.org/10.1111/j.1540-6261.1977.tb01979.x
Caldeira, J. F., Gupta, R., & Torrent, H. S. (2020). Forecasting U.S. Aggregate Stock Market Excess Return: Do Functional Data Analysis Add Economic Value? Mathematics, 8(11), 2042. https://doi.org/10.33 90/math8112042 DOI: https://doi.org/10.3390/math8112042
Chipunza, K. J., Muguto, H. T., Muguto, L., & Muzindutsi, P. F. (2020). Return predictability and valuation ratios: sector-level evidence on the Johannesburg stock exchange. Cogent Economics & Finance, 8(1), 1817252. https://doi.org/10.1080/23322039.2020.1817252 DOI: https://doi.org/10.1080/23322039.2020.1817252
Clark, T. E., McCracken, M. W., & Mertens, E. (2020). Modeling time-varying uncertainty of multiple-horizon forecast errors. Review of Economics and Statistics, 102(1), 17-33. https://doi.org/10.1162/rest_a_00809 DOI: https://doi.org/10.1162/rest_a_00809
Din, W. U. (2017). Stock return predictability with financial ratios: Evidence from PSX 100 index companies, International Journal of Basic Sciences and Applied Research, 6(3), 269-280. https://doi.org/10.2139/ssr n.3077890 DOI: https://doi.org/10.2139/ssrn.3077890
Eitan, G. N.A.,& Oleemat, N. H. A.(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, 5(2), 23-31. https://doi.org/10.6007/IJARAFMS/v5-i2/1559 DOI: https://doi.org/10.6007/IJARAFMS/v5-i2/1559
Emamgholipour, M., Pouraghajan, A., Tabari, N. A. Y., Haghparast, M., & Shirsavar, A. A. A. (2013). The effects of performance evaluation market ratios on the stock return: Evidence from the Tehran stock exchange. International Research Journal of Applied and Basic Sciences, 4(3), 696-703. https://doi.org/10.5539/i jef.v4n7p41 DOI: https://doi.org/10.5539/ijef.v4n7p41
Levy, R. A. (1967). The theory of random walks: A survey of findings. The American Economist, 11(2), 34-48. https://doi.org/10.1177/056943456701100205 DOI: https://doi.org/10.1177/056943456701100205
Maxwell, O.O., & Kehinde, E.F. (2012). Testing the Relationship between Price to Earings Ratio and Stock Returns in the Nigerian Stock Exchange Market. International Journal of Accounting, Finance & Economics Perspectives, 1(1).
Mallikarjuna, M., & Rao, R. P. (2019). Evaluation of forecasting methods from selected stock market returns. Financial Innovation, 5(1), 1-16. https://doi.org/10.1186/s40854-019-0157-x DOI: https://doi.org/10.1186/s40854-019-0157-x
Mirfakhr, S.H., Dehavi, H.D., Zarezadeh, E., Armesh, H., Manafi, M.,& Zraezadehand, S.(2011). Fitting the Relationship between Financial Variables and Stock Price through Fuzzy Regression Case study: Iran Khodro Company. International Journal of Business and Social Science, 2(11), 140-146.
McMillan, D. G. (2021). Forecasting US stock returns. The European Journal of Finance, 27(1-2), 86-109. https://doi.org/10.1080/1351847X.2020.1719175 DOI: https://doi.org/10.1080/1351847X.2020.1719175
Musallam, S. R. (2018). Exploring the relationship between financial ratios and market stock returns. Eurasian Journal of Business and Economics, 11(21), 101-116. https://doi.org/10.17015/ejbe.2018.021.06 DOI: https://doi.org/10.17015/ejbe.2018.021.06
Oxana L. Wieland (2015). Modern Financial Markets and the Complexity of Financial Innovation. Universal Journal of Accounting and Finance, 3(3), 117 - 125. https://doi.org/10.13189/ujaf.2015.030303 DOI: https://doi.org/10.13189/ujaf.2015.030303
Paddrik, M. E., & Tompaidis, S. (2019). Market-Making Costs and Liquidity: Evidence from CDS Markets. Working Paper, Financial Research. https://doi.org/10.2139/ssrn.3351401 DOI: https://doi.org/10.2139/ssrn.3351401
Pan, Z., Pettenuzzo, D., & Wang, Y. (2020). Forecasting stock returns: A predictor-constrained approach. Journal of Empirical Finance, 55(C), 200-217. https://doi.org/10.1016/j.jempfin.2019.11.008 DOI: https://doi.org/10.1016/j.jempfin.2019.11.008
Rapach, D., & Zhou, G. (2013). Forecasting stock returns. In Handbook of economic forecasting (Vol. 2, pp. 328-383). Elsevier. https://doi.org/10.1016/B978-0-444-53683-9.00006-2 DOI: https://doi.org/10.1016/B978-0-444-53683-9.00006-2
San Ong, T., Yichen, Y. N., & Teh, B. H. (2010). Can high price earnings ratio act as an indicator of the coming bear market in the Malaysia?. International Journal of Business and Social Science, 1(1), 194-213.
Surya, s., & Hasbi, h. (2015). The effect of capital structure profitability and market ratios on stock price in the property sector. Sci. Int. (Lahore), 27(6), 6273-6277.
Tao, R., & Brooks, C. (2019). Python Guide to Accompany Introductory Econometrics for Finance. Cambridge University. https://doi.org/10.2139/ssrn.3475303 DOI: https://doi.org/10.2139/ssrn.3475303
Vuolteenaho, T. (2000). Understanding the aggregate market-to-book ratio. In Department of Economics, Harvard University Working Paper. https://doi.org/10.2139/ssrn.161911 DOI: https://doi.org/10.2139/ssrn.161911
Vuolteenaho, T. (2002). What drives firm level stock returns?. The Journal of Finance, 57(1), 233-264. https://doi.org/10.1111/1540-6261.00421 DOI: https://doi.org/10.1111/1540-6261.00421
Wieland, O. L. (2015). Modern financial markets and the complexity of financial innovation. Universal Journal of Accounting and Finance, 3(3), 117–125. https://doi.org/10.13189/ujaf.2015.030303 DOI: https://doi.org/10.13189/ujaf.2015.030303
Wijaya, J. A. (2015). The effect of financial ratios toward stock returns among Indonesian manufacturing companies. IBuss Management, 3(2).261-271.
Wijesundera, A. A. V. I., Weerasinghe, D. A. S., Krishna, T. P. C. R., Gunawardena, M. M. D., & Peiris, H. R. I. (2015). Predictability of stock returns using financial ratios: Empirical evidence from Colombo Stock Exchange. Kelaniya Journal of Management, 4(2), 44-55. https://doi.org/10.4038/kjm.v4i2.7500 DOI: https://doi.org/10.4038/kjm.v4i2.7500
Zeytinoglu, E., Akarim, Y.D.,& Çelik, S. (2012). The Impact of Market-Based Ratios on Stock Returns: The Evidence from Insurance Sector in Turkey. International Research Journal of Finance and Economics, 84(C), 41-48.