Accounting and Finance Research, 2(1), 47-53, 2013
12 Pages Posted: 21 Oct 2012 Last revised: 14 Jul 2013
Date Written: October 21, 2012
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: 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