Time series analysis of the relationships among (macro) economic variables, the dividend yield and the price level of the S&P 500 Index

In this article, the relationships among the dividend yield on the S&P 500 Index, the yield on the 10 year Treasury note, the price level of the S&P 500 Index, the money supply, the level of the Industrial Production Index (IPI) and the level of the Consumer Price Index (CPI) are examined using monthly data from January 1959 to December 2009. We use a Vector Error Correction Model (VECM) to examine the possible simultaneous and cross short run relationships among the variables. The error correction portion of the model also allows us to examine long run relationships. We find evidence that there are simultaneous and significant interactions among the variables of interest. Specifically, all the variables exhibit endogeneity to some degree. Some of the discrepancies between our results and the results of others may lie in the sensitivity of the analysis to the time period of the sample. The two major implications of this study are to demonstrate that it would be a major folly of investors to consider only a direct cause and effect relationship among economic variables when selecting investments and to demonstrate that the endogeneity of macroeconomic and firm-specific variables needs to be taken into account when estimating econometric models.