Predicting Stock Returns in the Developing Markets of Eastern Europe

Abstract

How well can market fundamentals such as earnings-to-price (EP) ratios, book-to-market (BM) ratios, and dividend yields (DY), along with political risk measures and economic variables, predict stock market returns in the transitional countries of Eastern Europe? BM ratios are positively and significantly related to future returns with 1- to 12-month horizons. There is some evidence that EP ratios are negatively related to returns with holding periods longer than six months. Dividend yields are on average positively related to stock returns but with lower degrees of statistical significance. The findings also show that stock returns are significantly related to market liquidity and systematic risk. The linkages between returns and economic and political variables are mixed and inconclusive.