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Multivariate Causal Estimates of Dividend Yields, Price Earning Ratio and Expected Stock Returns: Experience from Malaysia

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  • Wan Mahmood, Wan Mansor
  • Abdul Fatah, Faizatul Syuhada

Abstract

The study examines the relationship among Malaysian’s market stock return, dividend yields and price earnings rato. Specifically, it examines the existence of long-run and short-run relationship and also their predictive power (causality) between and among market stock return, dividend yieds and price earnings. Using the monthly data from 1989-2005, the study finds that all these fundamental variables have a strong long run relationship. As for the short run relationship, the results show significant positive predictive power from dividend yield to stock return and significant negative relation from stock returns toprice earning ratios. In addition, applyingmultivariate causality test, the results show that both dividend yields and price earning ratio Granger cause (predict) the stock return. Similar results are found from stock returns and P/E ratio to dividend yield, as well as from dividend yied and stock returns to P/E raton but with lesser magnitude. Thus, fundamental variables are an important source of nformation in determnng stock market returns and useful to investors and other marke participants in deciding their investment strategies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14614.

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Date of creation: 20 Jun 2007
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Handle: RePEc:pra:mprapa:14614

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Keywords: Stock return; dividend yield; price earning ratio; Malaysian market;

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  1. Nieh, Chien-Chung & Lee, Cheng-Few, 2001. "Dynamic relationship between stock prices and exchange rates for G-7 countries," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 41(4), pages 477-490.
  2. Kothari, S. P. & Shanken, Jay, 1992. "Stock return variation and expected dividends : A time-series and cross-sectional analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 31(2), pages 177-210, April.
  3. Owen Lamont, . "Earnings and Expected Returns," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 345, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
  5. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  6. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  7. Goetzman, W.N. & Jorion, P., 1992. "Testing the Predictive Power of Dividend Yields," Papers, Columbia - Graduate School of Business 93-03, Columbia - Graduate School of Business.
  8. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  9. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  11. Richard A. Ajayi & Mbodja Mougouė, 1996. "On The Dynamic Relation Between Stock Prices And Exchange Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 193-207, 06.
  12. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, American Finance Association, vol. 46(5), pages 1575-617, December.
  13. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195060119, October.
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