Dynamic Response of Equity Market Returns to Corporate Profit Growth Shock
12 Pages Posted: 1 Aug 2013 Last revised: 24 Aug 2013
Date Written: July 31, 2013
This study investigates how returns on the S&P 500 (SP) dynamically respond to the aggregate corporate profit growth (CP) shock. The results from running the VAR model using quarterly data from 1951Q4 to 2012Q4 shows that returns on the SP significantly and positively respond to the CP shock instantly in the first quarter and retreat back to the zero territory afterwards. The results obtained from running the Granger-causality Wald tests show that CP Granger-causes SP to spike. CP forecasts about 3.50% of variability of the returns on the SP at the two- to eight-quarter horizons.
Keywords: corporate profit growth, returns on the S&P 500, VAR
JEL Classification: G12, G14, G17
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