The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns
AbstractA number of financial variables have been shown to be effective in explaining the time-series of aggregate equity returns in both the UK and the US. These include, "inter alia", the equity dividend yield, the spread between the yields on long and short government bonds, and the lagged equity return. Recently, however, the ratio between the long government bond yield and the equity dividend yield - the gilt-equity yield ratio - has emerged as a variable that has considerable explanatory power for UK equity returns. This paper compares the predictive ability of the gilt-equity yield ratio with these other variables for UK and US equity returns, providing evidence on both in-sample and out-of-sample performance. For UK monthly returns, it is shown that while the dividend yield has substantial in-sample explanatory power, this is not matched by out-of sample forecast accuracy. The gilt-equity yield ratio, in contrast, performs well both in-sample and out-of-sample. Although the predictability of US monthly equity returns is much lower than for the UK, a similar result emerges, with the gilt-equity yield ratio dominating the other variables in terms of both in-sample explanatory power and out-of-sample forecast performance. The gilt-equity yield ratio is also shown to have substantial predictive ability for long horizon returns. Copyright Blackwell Publishers Ltd 2000.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.
Volume (Year): 27 (2000-05)
Issue (Month): 3&4 ()
Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X
Other versions of this item:
- Richard D.F. Harris & Rene Sanchez-Valle, 2000. "The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3-4), pages 333-357.
- Harris, R.D.F. & Sanchez-Valle, R., 1998. "The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns," Discussion Papers 9815, Exeter University, Department of Economics.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Guidolin, Massimo & Hyde, Stuart, 2012.
"Can VAR models capture regime shifts in asset returns? A long-horizon strategic asset allocation perspective,"
Journal of Banking & Finance,
Elsevier, vol. 36(3), pages 695-716.
- Massimo Guidolin & Stuart Hyde, 2011. "Can VAR Models Capture Regime Shifts in Asset Returns? A Long-Horizon Strategic Asset Allocation Perspective," Working Papers 414, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Massimo Guidolin & Stuart Hyde, 2010. "Can VAR models capture regime shifts in asset returns? a long-horizon strategic asset allocation perspective," Working Papers 2010-002, Federal Reserve Bank of St. Louis.
- Alain Durré & Pierre Giot, 2007.
"An International Analysis of Earnings, Stock Prices and Bond Yields,"
Journal of Business Finance & Accounting,
Wiley Blackwell, vol. 34(3-4), pages 613-641.
- Alain Durré & Pierre Giot, 2005. "An international analysis of earnings, stock prices and bond yields," Working Paper Series 515, European Central Bank.
- Alain Durré & Pierre Giot, 2005. "An international analysis of earnings, stock prices and bond yields," Working Paper Research 73, National Bank of Belgium.
- GIOT, Pierre & PETITJEAN, Mikael, 2006.
"Short-term market timing using the Bond-Equity Yield Ratio,"
CORE Discussion Papers
2006090, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Pierre Giot & Mikael Petitjean, 2009. "Short-term market timing using the bond-equity yield ratio," European Journal of Finance, Taylor and Francis Journals, vol. 15(4), pages 365-384.
- Estrada, Javier, 2009. "The fed model: The bad, the worse, and the ugly," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 214-238, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.