The Orthogonal Response of Stock Returns to Dividend Yield and Price-to-Earnings Innovations
University of Maryland, Eastern Shore; University of Maryland, College Park
October 21, 2012
Accounting and Finance Research, 2(1), Forthcoming.
This study investigates how returns on the S&P 500 index respond orthogonally to dividend yield and price-to-earnings innovations. The unrestricted vector autoregressive (VAR) analysis of monthly data from 1871 to 2012 shows that the response of returns on the S&P 500 index to dividend yield innovation, based on the 12-month horizon, is positive in the first three months, negative in the 4th through 7th months and positive again after that. The returns on the S&P 500 index are negative in the first five months following price-to-earnings shock. The results of the Granger causality tests indicate that dividend yield and price-to-earnings cause the movement in stock returns.
Number of Pages in PDF File: 12
Keywords: S&P 500 returns, dividend yield, price-to-earning ratio
JEL Classification: G10, G17Accepted Paper Series
Date posted: October 21, 2012 ; Last revised: December 30, 2012
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