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The Orthogonal Response of Stock Returns to Dividend Yield and Price-to-Earning Innovations

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  • Vichet Sum

Abstract

This study investigates how returns on the S&P 500 index respond orthogonally to dividend yield and price-to-earning innovations. The unrestricted vector autoregression (VAR) analysis of monthly data from 1871 to 2012 shows that the response of returns on the S&P 500 index to dividend yield innovation, based on the 12-month horizon, is positive in the first three months, negative in the 4th through 7th months and positive again after that. The returns on the S&P 500 index are negative in the first five months following price-to-earning shock. The Granger causality tests indicate a causal link between returns on the S&P 500 index, dividend yield and price-to-earning. This study offers an important implication for asset management and valuation.

Suggested Citation

  • Vichet Sum, 2013. "The Orthogonal Response of Stock Returns to Dividend Yield and Price-to-Earning Innovations," Accounting and Finance Research, Sciedu Press, vol. 2(1), pages 1-47, February.
    • Handle: RePEc:jfr:afr111:v:2:y:2013:i:1:p:47
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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