The fed model: The bad, the worse, and the ugly
AbstractThe negative relationship between stock market P/E ratios and government bond yields seems to have become conventional wisdom among practitioners. However, limited empirical evidence and a misleading suggestion that the model originated in the Fed are used to support the model's plausibility. This article argues that the Fed model is flawed from a theoretical standpoint and reports evidence from 20 countries that seriously questions its empirical merits. Despite its widespread use and acceptance, the Fed model is found to be a failure both as a normative and as a positive model of equity pricing.
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Bibliographic InfoArticle provided by Elsevier in its journal The Quarterly Review of Economics and Finance.
Volume (Year): 49 (2009)
Issue (Month): 2 (May)
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Web page: http://www.elsevier.com/locate/inca/620167
Fed model P/E ratios Interest rates Stock market valuation;
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