Evaluating the efficiency of risk based stock return Forecasting in selected capital market industries

Subject Areas : Risk Management

Hamid Reza Akhbari ¹ , Heydar Mohammadzadeh Salteh ² , Rasoul Baradaran Hassanzadeh ^{3 *} , Mehdi Zeynali ⁴

1 - Department of Accounting, Ta.C., Islamic Azad University, Tabriz, Iran.
2 - Department of Accounting, Mara.C., Islamic Azad University, Marand, Iran.
3 - Department of Accounting, Ta.C., Islamic Azad University, Tabriz, Iran.
4 - Department of Accounting, Ta.C., Islamic Azad University, Tabriz, Iran.

Received: 2023-08-08 Accepted : 2025-01-11 Published : 2025-09-28

Keywords: Efficiency, Predicting Stock Returns, Risk, Selected Capital Market Industries,

Abstract :

Purpose: One of the key tasks in the field of investment is the optimal allocation of resources and the attainment of maximum returns. In this regard, stock return forecasting can be influenced by risk factors. This study aims to evaluate the efficiency of risk-based stock return forecasting in selected industries of the Iranian capital market.

Research Methodology: This study is applied in terms of its objective. Considering the nature of the data, it is classified as a post-event (ex-post facto) research. The reasoning method follows an inductive logic, and in terms of theoretical orientation, it is grounded in positive theory. The required data and information for the efficiency evaluation were mainly obtained from the financial statements of firms, databases of the Central Bank of Iran, and the resources of the Tehran Stock Exchange. After initial processing and classification in Excel, the data were statistically analyzed using R and GAMS software. It is noteworthy that the research sample includes 101 firms from 9 different industries over the period 2013 to 2021.

Findings: The results indicate that the Iranian capital market did not experience full efficiency in stock return forecasting during 2020 and 2021. Moreover, a downward trend in stock return efficiency was observed throughout the research period, which is attributable to the lack of acceptance and improper management of the capital market from a macroeconomic perspective. In other words, in Iran’s current economic conditions, systematic and unsystematic risk factors fail to adequately support reliable forecasts of future stock returns, due to heightened macroeconomic uncertainty. Therefore, achieving full efficiency is subject to various constraints.

Originality / Value: For rational decision-making, capital market participants need to properly account for both systematic and unsystematic risk in line with the efficiency of the Iranian stock market, while considering prevailing macroeconomic conditions.

 

References:

Aabo, T., Fraser, J. R., & Simkins, B. J. (2005). The rise and evolution of the chief risk officer: Enterprise risk management at Hydro One. Journal of Applied Corporate Finance, 17(3), 62-75.
Abdollahzadeh, L., Hanifi, F., & Fallah, M. (2021). Provide a Model for Forecasting the Stock Price Crash Risk in Tehran Stock Exchange on the basis of Hutton & chen models. Financial Engineering and Portfolio Management, 12(46), 146-170. [In Persian]
Addoum, J. M., Delikouras, S., Korniotis, G. M., & Kumar, A. (2019). Income hedging, dynamic style preferences, and return predictability. The Journal of Finance, 74(4), 2055-2106.
Aksoy, M., & Demiralay, S. (2019). The effects of terrorism on Turkish financial markets. Defence and Peace Economics, 30(6), 733-755.
Alam, N. (2020). Do oil price shock, and other macroeconomic variables affect the stock market: A study of the Saudi stock market. Humanities & Social Sciences Reviews, 8(3), 1234-1242.
Ali, H., & Hegazy, A. Y. (2022). Dividend policy, risk and the cross-section of stock returns: Evidence from India. International Review of Economics & Finance, 79, 169-192.
Atif, M., Raza Rabbani, M., Bawazir, H., Hawaldar, I. T., Chebab, D., Karim, S., & AlAbbas, A. (2022). Oil price changes and stock returns: Fresh evidence from oil exporting and oil importing countries. Cogent Economics & Finance, 10(1), 2018163.
Azad, A., & Pourzamani, Z. (2022). Analysis of company performance from the perspective of risk and management system: artificial intelligence approach. Journal of Management Accounting and Auditing Knowledge, 11(44), 347-371. [In Persian]
Banks, E. (2012). Risk culture: A practical guide to building and strengthening the fabric of risk management. Springer.
Beaver, W. H., Lambert, R. A., & Ryan, S. G. (1987). The information content of security prices: A second look. Journal of Accounting and Economics, 9(2), 139-157.
Beaver, W., Lambert, R., & Morse, D. (1980). The information content of security prices. Journal of Accounting and Economics, 2(1), 3-28.
Beck, T. (2003). Stock markets, banks, and economic development: Theory and evidence. EIB papers, 8(1), 37-54.
Bhusal, A., & Gautam, M. S. (2022). Impact of Gold Prices on Stock Exchange: An Empirical Case Study of Nepal. arXiv preprint arXiv:2202.00007.
Bradshaw, M. T., Richardson, S. A., & Sloan, R. G. (2006). The relation between corporate financing activities, analysts’ forecasts and stock returns. Journal of accounting and economics, 42(1-2), 53-85.
Braumann, E. C. (2018). Analyzing the role of risk awareness in enterprise risk management. Journal of management accounting research, 30(2), 241-268.
Chatfield, C. (1993). Calculating interval forecasts. Journal of Business & Economic Statistics, 11(2), 121-135.
Choi, J. H., Choi, S., Myers, L. A., & Ziebart, D. (2019). Financial statement comparability and the informativeness of stock prices about future earnings. Contemporary Accounting Research, 36(1), 389-417.
Christoffersen, P. F. (1998). Evaluating interval forecasts. International economic review, 841-862.
Chrıstofıs, N., Kollıas, C., Papadamou, S., & Stagıannıs, A. (2013). Istanbul stock market’s reaction to terrorist attacks. Doğuş Üniversitesi Dergisi, 14(2), 153-164.
Collier, P. M., Berry, A. J., & Burke, G. T. (2006). Risk and management accounting: best practice guidelines for enterprise-wide internal control procedures. Elsevier.
Collins, D. W., Kothari, S. P., Shanken, J., & Sloan, R. G. (1994). Lack of timeliness and noise as explanations for the low contemporaneuos return-earnings association. Journal of accounting and economics, 18(3), 289-324.
Cormican, K. (2014). Integrated enterprise risk management: From process to best practice. Modern Economy, 5(4), 401-413.
Da Silva, P. P. (2022). Market efficiency and the capacity of stock prices to track a firm's future profitability. Borsa Istanbul Review, 22(3), 452-464.
Dai, Z., & Zhu, H. (2020). Stock return predictability from a mixed model perspective. Pacific-Basin Finance Journal, 60, 101267.
Dehghan Khavari, S., & Mirjalili, S. H. (2020). Interaction of systematic risk with stock returns in Tehran Stock Exchange. Financial Economics, 13(49), 257-282. [In Persian]
Dia, M. (2009). A portfolio selection methodology based on data envelopment analysis. INFOR: Information Systems and Operational Research, 47(1), 71-79.
Fama, E. F., & French, K. R. (1988). Dividend yields and expected stock returns. Journal of financial economics, 22(1), 3-25.
Ferreira, T., Xavier, G. C., & Martins, O. S. (2018). Political uncertainty and risk premium in the Brazilian stock market. SSRN.
Frezza, M., Bianchi, S., & Pianese, A. (2022). Forecasting Value-at-Risk in turbulent stock markets via the local regularity of the price process. Computational Management Science, 19(1), 99-132.
Günay, S. (2016). Is political risk still an issue for Turkish stock market? Borsa Istanbul Review, 16(1), 21-31.
Hashemi, A., & Jalali Moghadam, H. (2013). The Effect of Accruals on the Relationship of External Financing and Future Stock Returns. Financial Accounting Research, 5(2), 53-72. [In Persian]
Hatamerad, S., Haghighat J., Asgharpur, H., & Adrangi, B. (2022). Evaluation of macro factors affecting stock price index: Bayesian averaging approach. QJFEP, 10(37), 73-111. [In Persian]
Hedayat Mazhari, R., Khoramabadi, M., & Lashgar Ara, S. (2021). Assessing Efficiency Using Data Envelopment Analysis Method and its Relation to Financial Ratios. Financial Accounting Research, 13(3), 89-110. [In Persian]
Hekmat, H., Rahmani, A., Molanazari, M., Mousavi, M., & Ghalibaf Asl, H. (2019). Accounting Information & Semi-Strong Stock Market Efficiency. Empirical Research In Accounting, 9(36), 23-50. [In Persian]
Herwartz, H. (2017). Stock return prediction under GARCH—An empirical assessment. International Journal of Forecasting, 33(3), 569-580.
Hoque, M. E., & Zaidi, M. A. S. (2020). Global and country-specific geopolitical risk uncertainty and stock return of fragile emerging economies. Borsa Istanbul Review, 20(3), 197-213.
Hosseinian, K., & Momeni, A. (2018). Investigating the impact of information risk on stock returns and cost of capital in companies listed on the Tehran Stock Exchange. The 5th International Conference on Management and Accounting Sciences. [In Persian]
Jones, C. P. (2009). Investments: Analysis and Management. Wiley.
Kiani Harchegani, M., Nabavi Chashmi, S. A., & Memarian, E. (2014). Optimizing Stock Portfolio with regard to Minimum Level of Total Risk using Genetic Algorithm. Journal of Investment Knowledge, 3(11), 125-164. [In Persian]
Kothari, S. P. (2001). Capital markets research in accounting. Journal of accounting and economics, 31(1-3), 105-231.
Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.
Levine, R. (1997). Financial development and economic growth: views and agenda. Journal of economic literature, 35(2), 688-726.
Luo, Y., Wang, X., Zhang, C., & Huang, W. (2021). Accounting-based downside risk and expected stock returns: Evidence from China. International Review of Financial Analysis, 78, 101920.
Mallikarjuna, M., & Rao, R. P. (2019). Evaluation of forecasting methods from selected stock market returns. Financial Innovation, 5(1).
Merchant, K. A., & Van der Stede, W. A. (2007). Management control systems: performance measurement, evaluation and incentives. Pearson education.
Mikes, A. (2009). Risk management and calculative cultures. Management accounting research, 20(1), 18-40.
Mikes, A. (2011). From counting risk to making risk count: Boundary-work in risk management. Accounting, organizations and society, 36(4-5), 226-245.
Moradi, M., Ghorbani, M., & Oskou, V. (2024). The effect of management ability on the relationship between CEO financial knowledge and unsystematic risk. Journal of Advances in Finance and Investment, 5(2), 187-210. [In Persian]
Muijsson, C., & Satchell, S. (2020). The role of bank funding in systematic risk transmission. Finance Research Letters, 33, 101222.
Naderi Nooreini, M. M., & Ashari, E. (2015). Accounting Quality and Stock Price Delay. Accounting and Auditing Research, 7(28), 88-99. [In Persian]
Neukirchen, D., Engelhardt, N., Krause, M., & Posch, P. N. (2022). Firm efficiency and stock returns during the COVID-19 crisis. Finance Research Letters, 44, 102037.
Pan, L., & Politis, D. N. (2016). Bootstrap prediction intervals for linear, nonlinear and nonparametric autoregressions. Journal of Statistical Planning and Inference, 177, 1-27.
Pishbin, S. A. M., & Sari, M. A. (2022). Impact of stock price crash risk on the CEO's future power. Journal of Advances in Finance and Investment, 3(6), 79-100. [In Persian]
Raei, R., Mohammadi, S., & Ajam, A. (2022). Development of the Model of Factors Affecting Stock Returns. Journal of Asset Management and Financing, 10(3), 119-142. [In Persian]
Rahmani, A., Bashiri Manesh, N., & Shahrokhi, S. S. (2012). Effects of Management Earnings Forecasts on Future earnings response coefficient. Journal of Accounting Knowledge, 3(10), 29-50. [In Persian]
Rajan, R., & Zingales, L. (1998). Debt, folklore, and cross‐country differences in financial structure. Journal of Applied Corporate Finance, 10(4), 102-107.
Ramiah, V., & Graham, M. (2013). The impact of domestic and international terrorism on equity markets: evidence from Indonesia. International Journal of Accounting & Information Management, 21(1), 91-107.
Redl, C. (2018). Macroeconomic uncertainty in south africa. South African Journal of Economics, 86(3), 361-380.
Rezaie, F., & Soleimani Rad, S. (2012). Influence of information content of earning on price and buy-hold period return. Financial Knowledge of Securities Analysis, 5(13), 1-19. [In Persian]
Rohmawati, S., Mutmainnah, M., Asas, F., & Khasanah, U. (2022). Analysis Of The Effect Of The Rupiah Exchange, World Oil Price, World Gold Price On The Joint Stock Price Index In The Indonesia Stock Exchange. International Journal of Science, Technology & Management, 3(1), 153-166.
Shafizadeh, A. (1996). Research on the relationship between systematic risk and stock returns in Tehran Stock Exchange (Master Thesis, Tehran University). [In Persian]
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting review, 289-315.
Sobreira, N., & Louro, R. (2020). Evaluation of volatility models for forecasting Value-at-Risk and Expected Shortfall in the Portuguese stock market. Finance Research Letters, 32, 101098.
Tehrani, R., & Nourbakhsh, A. (2024). Investment management. Neghahe Danesh. [In Persian]
Tone, K., & Tsutsui, M. (2010). Dynamic DEA: A slacks-based measure approach. Omega, 38(3-4), 145-156.
Visaltanachoti, N., & Yang, T. (2010). Speed of convergence to market efficiency for NYSE-listed foreign stocks. Journal of Banking & Finance, 34(3), 594-605.
Warfield, T. D., & Wild, J. J. (1992). Accounting recognition and the relevance of earnings as an explanatory variable for returns. Accounting Review, 821-842.
Yildirim, Z. (2016). Global financial conditions and asset markets: Evidence from fragile emerging economies. Economic Modelling, 57, 208-220.
Zhang, C. X., Li, J., Huang, X. F., Zhang, J. S., & Huang, H. C. (2022). Forecasting stock volatility and value-at-risk based on temporal convolutional networks. Expert Systems with Applications, 207, 117951.