International Earnings to Price Ratio Convergence: Evidence from the European Union
The International Journal of Business and Finance Research, v. 9 (5) p. 37-55
20 Pages Posted: 29 Jan 2016
Date Written: 2015
This paper investigates whether any pattern of convergence of international earnings-to-price ratios that exist for a sample of 19 European Union (EU) countries over the period 1994-2012 can be detected through the methodology of Phillips and Sul (2007). This methodology is based on a general form of a nonlinear time varying factor model and allows for cross sectional heterogeneity as well as for different transitional time paths towards equilibrium. The results show that such a convergence is not present. Next, the study aims at detecting any potential factors supporting the pattern of divergence. The empirical findings reveal that such divergence patterns mainly reflect divergence in economic factors.
Keywords: Earnings-Price Ratios; Club Convergence; Clustering Procedure; European Markets
JEL Classification: G10, C23
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