Dynamic Response of Market Dividend Yield and Price-to-Earnings Ratio to Corporate Profit Growth Shock
20 Pages Posted: 1 Aug 2013 Last revised: 4 May 2014
Date Written: July 31, 2013
This study examines the dynamic response of S&P 500 dividend yield (DY) and S&P 500 price-to-earnings ratio (PE) to corporate profit growth (CP) shock. Using the VAR model to analyze quarterly data from 1951Q4 to 2012Q4, the results show that both DY and PE significantly drop immediately following the shock to the CP. The Granger-causality Wald tests show that CP Granger-causes DY and PE. There is no response feedback from DY and PE to CP. The results from variance decomposition analysis show that CP contributes around 1.28% and 7.34% to the PE forecast errors at the respective two- and four-quarter horizons. In addition, CP contributes about 5.25% and 5.44% to the DY forecast errors at the respective two- and eight-quarter horizons.
Keywords: S&P 500 dividend yield, S&P 500 price-to-earnings ratio, corporate profit growth
JEL Classification: G12, G14, G17
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