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An international analysis of earnings, stock prices and Bond yields

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  • DURRE, Alain
  • GIOT, Pierre

Abstract

This paper assesses the possible contemporaneous relationship between stock index prices, earnings and long-term government bond yields for a large number of countries and over a time period that spans several decades. In a cointegration framework, our analysis looks at three hypotheses. First, is there a long-term contemporaneous relationship between earnings, stock prices and government bond yields? Second, does a deviation from this possible long-run equilibrium impact stock prices such that the equilibrium is restored? Third, do government bond yields play a significant role in the long-run relationship or does the latter only involve stock prices and earnings? We also study the short-term impact of changes in long-term government bond yields on stock prices and discuss our short-term and long-term results in light of the recent developments regarding the so-called Fed model.

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File URL: http://dx.doi.org/10.1111/j.1468-5957.2007.02010.x
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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -1984.

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Handle: RePEc:cor:louvrp:-1984

Note: In : Journal of Business Finance & Accounting, 34 (3-4), 613-641, 2007
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  1. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
  2. Favero, Carlo A & Mosca, Federico, 2001. "Uncertainty on Monetary Policy and the Expectational Model of the Term Structure of Interest Rates," CEPR Discussion Papers 2748, C.E.P.R. Discussion Papers.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  5. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
  6. 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.
  7. Joel Lander & Athanasios Orphanides & Martha Douvogiannis, 1997. "Earnings forecasts and the predictability of stock returns: evidence from trading the S&P," Finance and Economics Discussion Series 1997-6, Board of Governors of the Federal Reserve System (U.S.).
  8. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  9. Levin, Eric J & Wright, Robert E, 1998. "The Information Content of the Gilt-Equity Yield Ratio," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(0), pages 89-101, Supplemen.
  10. MacDonald, Ronald & Power, David, 1995. "Stock prices, dividends and retention: Long-run relationships and short-run dynamics," Journal of Empirical Finance, Elsevier, vol. 2(2), pages 135-151, June.
  11. Campbell, J.Y. & Shiller, R.J., 1988. "Stock Prices, Earnings And Expected Dividends," Papers 334, Princeton, Department of Economics - Econometric Research Program.
  12. S. I. Spyrou, 2004. "Are stocks a good hedge against inflation? evidence from emerging markets," Applied Economics, Taylor & Francis Journals, vol. 36(1), pages 41-48.
  13. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 639-668, May.
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Cited by:
  1. Bandholz, Harm & Clostermann, Jörg & Seitz, Franz, 2007. "Explaining the US bond yield conundrum," OTH im Dialog: Weidener Diskussionspapiere 2, University of Applied Sciences Amberg-Weiden (OTH).
  2. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2011. "Fractional Integration and Cointegration in US Financial Time Series Data," Discussion Papers of DIW Berlin 1116, DIW Berlin, German Institute for Economic Research.
  3. Migiakis, Petros M. & Bekiris, Fivos V., 2009. "Regime switches between dividend and bond yields," International Review of Financial Analysis, Elsevier, vol. 18(4), pages 198-204, September.
  4. Giot, Pierre & Petitjean, Mikael, 2007. "The information content of the Bond-Equity Yield Ratio: Better than a random walk?," International Journal of Forecasting, Elsevier, vol. 23(2), pages 289-305.
  5. Pierre Giot & Mikael Petitjean, 2009. "Short-term market timing using the bond-equity yield ratio," The European Journal of Finance, Taylor & Francis Journals, vol. 15(4), pages 365-384.
  6. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: Sprint swimming in short bonus pools?," Research Discussion Papers 2/2014, Bank of Finland.
  7. GIOT, Pierre & PETITJEAN, Mikael, 2005. "Dynamic asset allocation between stocks and bonds using the Bond-Equity Yield Ratio," CORE Discussion Papers 2005010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Joseph Friedman & Yochanan Shachmurove, 2005. "European Stock Market Dynamics Before and After the Introduction of the Euro," PIER Working Paper Archive 05-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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