PRICE-EARNING (P/E) RATIOS OF BROAD CATEGORIES OF U.S. STOCKS AND 3-MONTH T-BILL RATE: EVIDENCE FROM COINTEGRATION ANALYSES

This paper explores the dynamic relationships between P/E ratios and three-month T-bill rates for broad categories of U.S. stocks within the cointegration framework by employing quarterly data from 1953.I to 1998.IV. The ADF unit root test results show that P/E ratios, stock prices and earnings as well as 3-month T-bill rates are nonstationary in levels both with and without trends at 5 percent level of significance. The ADF test results for cointegration reveal that only the P/E ratios of transportation stocks and 3-month T-bill rates have no long-run equilibrium relationship at 1 percent and higher levels of significance. The evidence from the error-correction models is mixed with regard to the directions of causality between P/E ratios and broad categories of stock prices.