P/E changes: some new results

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 meas...

Full description

Saved in:
Bibliographic Details
Published in:Journal of forecasting 2009-07, Vol.28 (4), p.358-370
Main Authors: Zorn, Thomas, Dudney, Donna, Jirasakuldech, Benjamas
Format: Article
Language:English
Subjects:
asset pricing
Comparative analysis
Discriminant analysis
Financial engineering
Financial models
Investment planning
Investors
Price earnings ratio
relative valuation
Stock prices
Stock returns
Stocks
Studies
Valuation
Wage-price relationship
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.
ISSN:0277-6693
1099-131X
DOI:10.1002/for.1097