Bi-Variate Causal Estimates of Dividend Yield, Earning Yield Ratios and Stock Index: A Case of Karachi Stock exchange

Abstract

The study examines the relationships between Pakistan’s market stock returns, dividend yields and earning yield ratios. Specifically, it examines the existence of long-run and short-run relationships between and among stock market return, dividend yield and earnings earning yield ratios. Using the monthly data from 1997-2007, the study finds that all these fundamental variables have a strong long run relationships. As for the short run relationship, the results show significant predictive power from dividend yield to stock return and stock market return to earning yield ratio. In addition to applying vector error correction model, the results show that there is the significant long-term equilibrium between stock market index, dividend yield and earning yield ratios. Hence, fundamental variables are an important source of information in determining the stock market returns and useful to investors and other stakeholders in making their investment decisions.

Keywords: Causal Relationship, Dividend Yield, Earning Yield and Stock Index.