Stock Market Performance: Variance Decomposition of Price-Earnings Ratio, Dividend Yield and Tobin's Q

Journal of Financial Transformation, 39, 63-67. April, 2014

14 Pages Posted: 15 Jul 2013 Last revised: 17 Apr 2014

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Date Written: July 14, 2013

Abstract

This study examines the relative importance of percentage change in price-to-earnings ratio (PE), percentage change in dividend yield (DY) and change in aggregate Tobin’s q ratio (∆TBQ) in forecasting returns on the S&P 500 (SP). The results from the variance decomposition analysis of quarterly data from 1951Q4 to 2012Q4 show that ∆TBQ beats out PE and DY in forecasting SP. While PE and DY together only forecast about 3.2% of SP at the two-quarter to eight-quarter horizons, ∆TBQ does so at about 66%. The Granger-causality test results reveal that ∆TBQ Granger-causes PE and DY. The generalized impulse response functions of the three variables are also estimated.

Keywords: Tobin’s q ratio, price-earnings ratio, dividend yield, stock market performance

JEL Classification: G12, G14, G17

Suggested Citation

Sum, Vichet, Stock Market Performance: Variance Decomposition of Price-Earnings Ratio, Dividend Yield and Tobin's Q (July 14, 2013). Journal of Financial Transformation, 39, 63-67. April, 2014. Available at SSRN: https://ssrn.com/abstract=2293532 or http://dx.doi.org/10.2139/ssrn.2293532

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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