Excess return on the Icelandic stock market

Abstract

This study examines the relationship between P/E?ratio, q?ratio, dividend yield, historical returns, company size and returns of Icelandic stocks. The study uses monthly return data of stocks from the Iceland Stock Exchange from January 1993 to June 2003. The methodology is based on building portfolios on the basis of the above variables. Every month, from January 1993 to June 2003, the stocks in the sample were ranked according to the variable examined and then grouped into four portfolios. The performance of each portfolio was then measured and compared both in absolute terms and correcting for systematic risk. The results are that returns on stocks with a low P/E?ratio were much substantially higher than returns on other stocks and this difference was statistically significant. The returns of small stocks and stocks with a low q?ratio were higher than that of other stocks but this difference was not statistically significant. No relationship was detected between returns and historical returns, and between returns and dividend yield.