Forecasting Stock Market Returns: An Empirical Investigation for United Kingdom

Abstract

Stock markets play a vital role in the economic development as a transmission mechanism through which savings are mobilized and adequately circulated across various economic sectors with a view to realize comprehensive growth. The current paper aims at identifying those factors that predict the stock market returns. For this purpose, a multivariate panel regression approach is employed. The empirical econometric model of the study is developed at two levels- firm level and macroeconomic level indicators. The annual panel data is constructed for 50 non-financial firms that are listed at London Stock Exchange during the period 2008-2017. We have employed robust Least Square estimation method.The findings showed that among financial performance factors, only net profit margin has significant predicting power for stock market returns. It presented signaling effect of net profit margin that attracts more investments. Moreover, we found that the selected set of macroeconomic factors have significant predicting power for stock market returns. Our paper contributes in the field of corporate finance as point of reference in the literature for the factors that predicts the stock market returns in the context of United Kingdom. In addition, it will eventually attract the attentions of academics, managers, policymakers, and investors.

Keywords: Financial performance, Macroeconomic conditions, Stock market returns, Panel regression and Least Squares.

JEL Codes: D22, G15 and F52.

DOI: 10.7176/EJBM/12-1-03

Publication date: January 31^st 2020