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.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.
Volume (Year): 27 (2000-05)
Issue (Month): 3&4 ()
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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; Insider Trading
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