Do the spreads between the E/P ratio and interest rates contain information on future equity market movements?
AbstractWe examine the usefulness of the spreads between the e/p ratio of the S&P 500 index and the yields on 3-month and 10-year Treasury securities as indicators of future market conditions. We find that while spreads are not particularly useful in a regression framework, the extreme values of the spreads do contain information on the market outlook. Specifically, for the period of 1967 to 1997, portfolios that only invested in the stock index when the spreads were above their historical tenth percentile levels produced higher average returns (not statistically significant) and lower variances (statistically significant) than the stock index.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number 99-03.
Date of creation: 1999
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-FIN-1999-08-04 (Finance)
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