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Stock market volatility and fluctuations in the price-earnings ratio

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  • Dimitrios Koutmos

Abstract

This paper examines the time-series relation between the price-earnings (P/E) multiple and market volatility for the G-7 markets. If investors are risk-averse agents and demand a higher required rate of return to take on more risk, then we should expect P/E to be inversely related to volatility. Using various specifications for volatility and P/E, the relationship is found to be negative and statistically significant across most markets under consideration. This provides indirect evidence that the required rate of return and risk are positively related. These findings also emphasise the importance of considering 'forward-looking' proxies, such as the P/E multiple, when investigating the intertemporal risk-return trade-off.

Suggested Citation

  • Dimitrios Koutmos, 2012. "Stock market volatility and fluctuations in the price-earnings ratio," International Journal of Computational Economics and Econometrics, Inderscience Enterprises Ltd, vol. 2(3/4), pages 223-237.
    • Handle: RePEc:ids:ijcome:v:2:y:2012:i:3/4:p:223-237
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    Cited by:

    1. Koutmos, Dimitrios & Song, Wei, 2014. "Speculative dynamics and price behavior in the Shanghai Stock Exchange," Research in International Business and Finance, Elsevier, vol. 31(C), pages 74-86.

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