Modifications on book-valued ratios

Artikel

Purpose: In this paper we try to explain US stock market variations and cash flow fundamentals by employing three different book-valued based ratios, First, we explore the explanatory capacity of the simple book-market ratio on time-varying expected returns, and procced on altering its construction so as to enhance its performance, We then run the extra mile by constructing two new ratios, the book-dividends and book-earnings ratios based on the long-run equilibrium relationships between book, dividends and earnings, Our analysis includes evidence of predictability on dividend and earnings growth rates on the S&P 500 for the most recent sample period 1926-2018, We also investigate the ratios' forecastability by sub-sampling. Design/methodology/approach: We commence our analysis with the conventional book-market (bm) ratio and by failing to reject the hypothesis of a unit root, we propose the modified book-market (mbm) ratio, whose construction is based on the long-run equilibrium relationship between book (b) and market (m) values, We proceed on associating book values to dividends and earnings series and fix the book-earnings (be) and the dividend-book (db) ratios, We similarly modify be and db, and examine their forecasting performance on returns, dividend and earnings growth. Findings: In-sample evidence suggests that an investor who employs mbm can improve its forecasts by 37% and 41% in the 7- and 10-year return horizon, while the modified dividend-book (mdb) proves even more beneficial by explaining 53% and 59% in similar return horizons. Our modified book-earnings (mbe) has a very good in-sample fit to the earnings growth data unlike the rest of the predictors, With respect to the out-of-sample performance, mbm manages to surpass the simplistic forecast benchmark only at the 10-year horizon by 15% while mdb attains an impressive of 47% and 71% at the 7- and 10-year return horizon. Research limitations/implications: Further research is required so as to solve the earnings puzzle in terms of forecasting along with the necessity to understand the economical sources behind non-stationarity in valuation ratios. Originality/value: We believe that our paper may prove enlightening to investors focused on portfolio allocation and asset pricing and scholars interested in return forecasting, capital budgeting and risk identification

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: International Journal of Business and Economic Sciences Applied Research (IJBESAR) ; ISSN: 2408-0101 ; Volume: 15 ; Year: 2022 ; Issue: 3 ; Pages: 24-37

Classification and Topics

• Classification: Wirtschaft ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates ; Contingent Pricing; Futures Pricing; option pricing ; Information and Market Efficiency; Event Studies; Insider Trading ; Financial Forecasting and Simulation
• Subject: book-market ratio ; modified book-market ratio ; book-valued ratios ; non-stationary ratios ; modified ratios ; return predictability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Georgiou, Catherine
• Event: Veröffentlichung
• (who): International Hellenic University (IHU)
• (where): Kavala
• (when): 2023

Further information

• DOI: doi:10.25103/ijbesar.153.02
• Handle: http://hdl.handle.net/10419/280260
• Last update: 10.03.2025, 11:44 AM CET