Forecasting Ability of Valuation Ratios (Nairobi Stock Exchange)

Abstract

This research paper provides a test of the extent of predictive ability of three- valuation ratios-Price Earnings, Dividend Yield and Price Sales Ratios at the Nairobi Stock Exchange. The research question was-how useful are these valuation ratios in predicting future returns?

The, predictive regression models were subject to a small sample bias of fourteen organisations with a financial accounting year-end of 31st December, over a period of five years (1996 to 2000). The valuation ratios were then lagged for"one quarter in order to see what impact this has on the predictive ability of the valuation model.

The three ratios are found to have predictive ability only in some cases. This implies that they can be only be usedselectively. It could also be true that the forecasting period is different from the lagged period that was used of one quarter. "