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The High Price–Earnings Stock Market Danger Approach of Campbell and Shiller versus the BSEYD Model

In: STOCK MARKET CRASHES Predictable and Unpredictable and What To Do About Them

Author

Listed:
  • William T. Ziemba
  • Sebastien Lleo
  • Mikhail Zhitlukhin

Abstract

We show how to use Campbell and Shiller’s work on price-to-earnings (P/E) ratio and the predictability of long-term returns to create a crash prediction measure: the high P/E measure. Next, we present a statistical procedure to test the accuracy of crash prediction models. We use this procedure to test the accuracy of the bond–stock earnings yield differential (BSEYD) and high P/E models on a 51-year period on the US market, starting on January 1, 1962, and ending on December 31, 2014 (12,846 daily data points). At the end of the Chapter, we expand the analysis beyond the US market to look at the two main Chinese stock markets: Shanghai and Shenzhen. Material in this chapter is based on Lleo and Ziemba (2017) and Lleo and Ziemba (2016c).

Suggested Citation

  • William T. Ziemba & Sebastien Lleo & Mikhail Zhitlukhin, 2017. "The High Price–Earnings Stock Market Danger Approach of Campbell and Shiller versus the BSEYD Model," World Scientific Book Chapters, in: STOCK MARKET CRASHES Predictable and Unpredictable and What To Do About Them, chapter 4, pages 55-132, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813223851_0004
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    More about this item

    Keywords

    Stock Market Crashes; Brexit; Trump; Financial Bubbles;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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