The relationship between stock returns volatility and price multiples volatility - Investigating the Danish, Swedish, and Norwegian stock market
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The purpose of this master thesis is to examine the relationship between the volatility of stock returns and the volatility of price multiples. More specifically, we investigate if the volatility of price multiples can explain the variance in the volatility of stock returns. We examine both the price-tobook ratio, the price-earnings ratio and the price-cash-flow ratio. First, we use the GARCH(1,1) model to estimate and model the volatility of the stock returns and price multiples. Second, we use a Linear regression test to analyse how the variation in the volatility of stock returns is affected by the volatility of price multiples. Furthermore, we test if the coefficient of determination is constant in time and if it varies across industries. For our thesis, we obtain a sample of daily observations of the index stock price, P/E, P/B, and P/C ratio from companies listed on the Datastream Indices for Denmark, Sweden, and Norway in the period 2008-2018. We exclude non-listed companies. To calculate the volatility of the stock prices and price multiples we apply the use of continuously compounded returns. The results of this thesis show that the volatility of the P/E, P/B, and P/C ratio can explain the variance in the volatility of stock returns. The results show that the volatility of the P/B ratio is the best performer, while the volatility of the P/E ratio performs worst, the results for the P/C ratio are varying. This is evident in both the Norwegian-, Swedish-, and Danish stock market. We find evidence that the explanatory power differs across industries, but there is no clear direction or trend in any of the three stock markets. Furthermore, the results indicate that the volatility of the price multiples performs best at explaining the variance in the volatility of stock returns in periods of high market uncertainty, this holds for all three stock markets.
Master i økonomi og administrasjon