Open AccessThe Orthogonal Response of Stock Returns to Dividend Yield and Price-to-Earning Innovations
Author(s) -
Vichet Sum
Publication year - 2012
Publication title -
accounting and finance research
Language(s) - English
Resource type - Journals
eISSN - 1927-5994
pISSN - 1927-5986
DOI - 10.5430/afr.v2n1p47
Subject(s) - dividend yield , economics , dividend , vector autoregression , stock (firearms) , econometrics , index (typography) , valuation (finance) , yield (engineering) , shock (circulatory) , financial economics , monetary economics , dividend policy , finance , mechanical engineering , medicine , materials science , world wide web , computer science , engineering , metallurgy
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