Valuation Ratios and Stock Return Predictability; Evidence from TSE

Document Type : applied


1 Assistant Prof. of Economics, Graduate School of Management & Economics, Sharif University of Technology, Tehran, Iran

2 MSc. in Socio-Economic Systems Engineering, Graduate School of Management & Economics, Sharif University of Technology, Tehran, Iran

3 Associate, Cornerstone Research, Boston, USA


We study stock return predictability in the Tehran Stock Exchange over various horizons using four valuation ratios, and make in-sample and out-of-sample comparison with the historical mean model. Consistent with the literature, we find that valuation ratios do not predict returns over short horizons, but their predictive power increases with forecast horizon. For long, multi-year horizons we use bootstrapping to ensure valid statistical inference, given the persistence of the predictors and overlapping observations. With the exception of dividend payout ratio, valuation ratios have strong predictive power for 3 to 6 year horizons. The predictive power exhibits significant variation over time.


Main Subjects

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