Empirical relation between profit and share return: an application of MIDAS modeling

Abstract

The empirical relationship between earnings and stock returns has extensively investigated in finance. For this purpose, time series and panel data regression models have been used, in which the variables are sampled at the same frequency. However, since earnings and returns are made available at different frequencies, there are informational losses when they are converted to the same frequency. The main purpose of this article is to analyze the relationship between the earnings and stock returns of companies listed on B3, by means of the MIDAS modeling, which allows that data sampled at different frequencies can be included in the same regression. The period analyzed extends from January 1994 to December 2017. The results reveal a dynamic relationship, that is, positive in some moments and negative in others, between earnings and stock returns in the Brazilian stock market. In addition, it was found that, in order to obtain robust forecasts of quarterly profits, it is necessary to include as an explanatory variable, in addition to daily returns, lagged quarterly profits, in an autoregressive modeling.