The relevance of earning‐to‐price and ROE predictability for explaining Shenzhen stock exchange (SZSE), returns in China: A dynamic panel data approach

Abstract

The fundamental valuation (FV) perspective has been extended to the Shenzhen Stock Exchange (SZSE) in China by focusing on the role of forecasted earning‐to‐price ratio and return on equity (ROE). Forecasting the variables is being done using a linear dynamic panel data technique. The findings of the two‐step Generalized Method of Moments (GMM) analysis indicate that the forecasted E/P ratio and ROE significantly explain a portion of the variation in the SZSE stock return and remain highly statistically significant after risk proxy variables are included. Additionally, it confirms the existence of size, momentum, liquidity, and dividend yield in the SZSE. This supports the usefulness of an FV perspective based on the unique characteristics of the Chinese equity market in explaining stock returns and their potential utility in forecasting future stock returns.

Productivity, risk, and expected stock returns

“…Moreover, Batten and Vo (2019) indicate a negative relationship between liquidity and stock returns in the Ho Chi Minh City stock exchange (Vietnam). Arshad (2021) analyzed the effect of forecasted E/P (earnings-to-price ratio) and ROE (return on equity) on Shenzhen Stock returns (in China), and found that the E/P and ROE significantly explain Shenzhen stock returns even when controlling for well-known risk factors. Szczygielski et al (2020) investigate how macroeconomic factors, that proxy for systematic effects, relate to stock returns in the South African stock exchange.…”