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Stock Market Performance: Variance Decomposition of Price-Earnings Ratio, Dividend Yield and Tobin's Q
Journal of Financial Transformation (2014)
  • Vichet Sum
Abstract

This study examines the relative importance of percentage change in price-to-earnings ratio (PE), percentage change in dividend yield (DY) and change in aggregate Tobin’s q ratio (∆TBQ) in forecasting returns on the S&P 500 (SP). The results from the variance decomposition analysis of quarterly data from 1951Q4 to 2012Q4 show that ∆TBQ beats out PE and DY in forecasting SP. While PE and DY together only forecast about 3% of SP at the two-quarter to eight-quarter horizons, ∆TBQ does so at about 66%. The Granger-causality test results reveal that ∆TBQ Granger-causes PE and DY. The generalized impulse response functions of the three variables are also estimated.

Keywords
  • Tobin’s q ratio,
  • price-earnings ratio,
  • dividend yield,
  • stock market performance
Publication Date
March 25, 2014
Citation Information
Vichet Sum. "Stock Market Performance: Variance Decomposition of Price-Earnings Ratio, Dividend Yield and Tobin's Q" Journal of Financial Transformation Vol. 39 (2014)
Available at: http://works.bepress.com/vichetsum/48/