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Stock Market Price-to-Earnings Ratio and Credit Spread: Dynamic Response and Causality

Posted: 4 Oct 2013

See all articles by Vichet Sum

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Date Written: October 4, 2013

Abstract

This study examines the dynamic response of the S&P 500 price-to-earnings ratio (PE) to credit spread (CS) shock and causal direction between these two variables. Based on the analysis of monthly data from 1919M1 to 2013M8, the VAR results reveal that PE significantly jumps immediately following the shock to CS. The results obtained from Granger causality Wald tests also confirm a significant causal linkage between PE and CS. The variance decomposition results show that PE forecasts about 7.41%, and 12.43% at the 6-month and 12-month horizons respectively.

Keywords: S&P 500 price-to-earnings ratio, credit spread, VAR

JEL Classification: G12, G14

Suggested Citation

Sum, Vichet, Stock Market Price-to-Earnings Ratio and Credit Spread: Dynamic Response and Causality (October 4, 2013). Available at SSRN: https://ssrn.com/abstract=2335873

Vichet Sum (Contact Author)

University of Maryland Eastern Shore - School of Business and Technology ( email )

Engineering Aviation Science Complex – Room 2115
Princess Anne, MD 21853
United States
410-651-6531 (Phone)
410-651-6529 (Fax)

HOME PAGE: http://vichetsum.com

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