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The Orthogonal Response of Stock Returns to Dividend Yield and Price-to-Earnings Innovations

Accounting and Finance Research, 2(1), 47-53, 2013

12 Pages Posted: 21 Oct 2012 Last revised: 14 Jul 2013

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Date Written: October 21, 2012

Abstract

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.

Keywords: S&P 500 returns, dividend yield, price-to-earning ratio

JEL Classification: G10, G17

Suggested Citation

Sum, Vichet, The Orthogonal Response of Stock Returns to Dividend Yield and Price-to-Earnings Innovations (October 21, 2012). Accounting and Finance Research, 2(1), 47-53, 2013. Available at SSRN: https://ssrn.com/abstract=2164847 or http://dx.doi.org/10.2139/ssrn.2164847

Vichet Sum (Contact Author)

University of Maryland Eastern Shore - School of Business and Technology ( email )

2105 Kiah Hall
Princess Anne, MD 21853
United States
410-651-6531 (Phone)
410-651-6529 (Fax)

HOME PAGE: http://www.umes.edu/bma/Sum.html

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