Determinants of P/E ratio of an index- an empirical study

Abstract

In this study, an attempt is made to analyze and quantify the relationship between Price-Earnings multiple of the Indian stock market (represented by Nifty 50 index) and the fundamental and economic indicators. Ten variables highlighting dividends, earnings and returns of the market, and GDP growth, inflation, interest rates and money supply in the economy, were studied. The indicators were studied over a period of 76 quarters (July 2001 – April 2020), with a 1-quarter lag against dependent variable. Descriptive Statistics, Correlation and Linear Regression were used for analysis. When, Price-Earnings, or Earnings-Price multiple was used as dependent variable, several models were found to be significant. The final model had four significant variables namely, Dividend Yield of Nifty, Dividend Payout Ratio, Repo Rate and Standard Deviation of past 36-months returns, and explained 77 percent of P/E variation.