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P|E changes: some new results

Listed author(s):
  • Thomas Zorn

    (Department of Finance, University of Nebraska-Lincoln, Nebraska, USA)

  • Donna Dudney

    (Department of Finance, University of Nebraska-Lincoln, Nebraska, USA)

  • Benjamas Jirasakuldech

    (School of Business, Slippery Rock University of Pennsylvania, USA)

Registered author(s):

    The P|E ratio is often used as a metric to compare individual stocks and the market as a whole relative to historical valuations. We examine the factors that affect changes in the inverse of the P|E ratio (E|P) over time in the broad market (S&P 500 Index). Our model includes variables that measure investor beliefs and changes in tax rates and shows that these variables are important factors affecting the P|E ratio. We extend prior work by correcting for the presence of a long-run relation between variables included in the model. As frequently conjectured, changes in the P|E ratio have predictive power. Our model explains a large portion of the variation in E|P and accurately predicts the future direction of E|P, particularly when predicted changes in E|P are large or provide a consistent signal over more than one quarter. Copyright © 2008 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/for.1097
    File Function: Link to full text; subscription required
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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

    Volume (Year): 28 (2009)
    Issue (Month): 4 ()
    Pages: 358-370

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    Handle: RePEc:jof:jforec:v:28:y:2009:i:4:p:358-370
    DOI: 10.1002/for.1097
    Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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    1. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
    2. Chowdhury, Mustafa & Lin, Ji-Chai, 1993. "Fads and the Crash of '87," The Financial Review, Eastern Finance Association, vol. 28(3), pages 385-401, August.
    3. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
    4. Author-Name: John Geanakoplos & Michael Magill & Martine Quinzii, 2004. "Demography and the Long-Run Predictability of the Stock Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(1), pages 241-326.
    5. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    6. West, Kenneth D, 1988. " Bubbles, Fads and Stock Price Volatility Tests: A Partial Evaluation," Journal of Finance, American Finance Association, vol. 43(3), pages 639-656, July.
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