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Predicting DJIA Returns: Insights from Income Statement Variables

This study examines the predictability of the Dow Jones Industrial Average (DJIA) using income statement metrics from Q1 1979 to Q4 1999. We collected and organized data from 30 companies comprising the DJIA, focusing on per-share income statements. Our hypothesis suggests that higher income statement metrics can better predict DJIA returns. Using regression analysis on dividend, earnings, and EBITDA yields, we found that EBITDA yield is as strong a predictor of returns as dividend yield. Our findings highlight valuable insights for investors looking to understand market trends.

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Predicting DJIA Returns: Insights from Income Statement Variables

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  1. Predicting the DJIA:Going up the Income Statement BSD: Roberto Alatorre Prakash Arya Brian Chin Philipp Schmahl John Withrow

  2. Agenda • Data Collection • Data Organization • Results • Conclusions

  3. Data Collection • Collected data on the 30 companies that make up the DJIA • Quarterly Data • Q1 1979 through Q4 1999 • DJIA composition changes in: - Q2 1979 - Q4 1985 - Q1 1991 - Q2 1997 - Q4 1998 - Q4 1999

  4. Data Organization • Income Statement data on a per share basis: • EBITDA Yield for DJIA • Dividend Yield for DJIA • Earnings for DJIA • Divisor Calculation • ( Share Prices) / (Actual DJIA) • Base case and adjusting for stock splits, etc. • Modeling the DJIA

  5. BSD-DJIA vs. DJIA:

  6. Hypothesis The further you go up the Income Statement, the better the variables will be to predict the returns for the DJIA Rationale: • Dividends are at managers discretion • EBITDA is hard to manipulate

  7. Regression Results: Dividend Model: DJIAreturns = - 0.054 - 5.016*CrSprdLag + 2.273*TrmSprdLag + 1.255*TyldLag + 5.966*DivLag Earnings Model: DJIAreturns = 0.067 – 4.639*CrSprdLag + 2.479*TrmSprdLag + 0.788*TyldLag + 0.924*EarnLag EBITDA Model: DJIAreturns = 0.008 – 4.018*CrSprdLag + 2.449*TrmSprdLag + 1.014*TyldLag + 1.002*EbitLag

  8. Regression Results:

  9. Regression Results: p-Values Dividend Model 0.0071 Earnings Model 0.1034 EBITDA Model 0.0078

  10. DJIA In-Sample Results:

  11. DJIA Out-Sample Results:

  12. Conclusions: • For DOW 30 Blue Chip Companies, EBITDA Yield is as good a predictor as Dividend Yield • Confidence interval on predictions from Earning Yield is less than 90% • ARCH underestimates DJIA in sample and in validation period

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