The Importance of Financial Ratios in Predicting Stock Price Volatility: A Case Study of Amman Stock Exchange

Abstract

The purpose of this paper is to examine the ability of market ratios to predict stock prices of Jordanian firms. While stock prices tend to be a strong indicator of healthy economy, scholars identified financial ratios among the factors that can explain movements of stock prices. Although financial ratios depend on financial statements, market ratios in particular, have additional information related to market, therefore, this study rely on market ratios: dividend per share (DPS), earning per share (EPS), dividend yield (DY), Return on equity (ROE) and price/earnings ratio (P/E); to predict stock prices. The data has been collected from Amman Stock Exchange (ASE), financial statements of 7 Jordanian companies were analyzed for eleven years during the period (2005-2015), multi regression methods applied to test its hypotheses. The study revealed that market ratios can significantly predict stock prices by their own, and have the ability (as combined) to explain stock prices movements in the companies.