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Can the Forecasts Generated from E/P Ratio and Bond Yield be Used to Beat Stock Markets?

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Author Info

  • Wing-Keung Wong

    ()
    (National University of Singapore)

  • Boon-Kiat Chew

    ()
    (Independent Economic Analysis (Holdings) Limited)

  • Douglas Sikorski

    ()
    (National University of Singapore)

Abstract

This study tests the performance of stock market forecasts derived from technical analysis by means of a specific indicator. The indicator is computed from E/P ratios and bond yields. Several stock markets are studied over a 20-year period. Two test statistics are introduced to utilize the indicator. The results show that the forecasts generated from the indicator would enable investors to escape most of the crashes and catch most of the bull runs. The trading signals provided by the indicator can generate profits that are significantly better than the buy-and-hold strategy.

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File URL: http://www.fas.nus.edu.sg/ecs/pub/wp/wp0201.pdf
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Bibliographic Info

Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0201.

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Length: 33 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:nus:nusewp:wp0201

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Web page: http://www.fas.nus.edu.sg/ecs/index.html
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Related research

Keywords: Yield differential; Standardized yield differential; E/P ratio; bond yield; interest rate;

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References

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  1. Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Journal of Finance, American Finance Association, vol. 55(4), pages 1705-1770, 08.
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  3. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc.
  4. John Y. Campbell, 1985. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
  5. Wing-Keung Wong & Guorui Bian, 2004. "Estimating Parameters in Autoregressive Models with Asymmetric Innovations," Departmental Working Papers wp0408, National University of Singapore, Department of Economics.
  6. Levich, Richard M. & Thomas, Lee III, 1993. "The significance of technical trading-rule profits in the foreign exchange market: a bootstrap approach," Journal of International Money and Finance, Elsevier, vol. 12(5), pages 451-474, October.
  7. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  8. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
  9. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
  10. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-25, October.
  11. Jensen, Michael C & Bennington, George A, 1970. "Random Walks and Technical Theories: Some Additional Evidence," Journal of Finance, American Finance Association, vol. 25(2), pages 469-82, May.
  12. Balvers, Ronald J & Cosimano, Thomas F & McDonald, Bill, 1990. " Predicting Stock Returns in an Efficient Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1109-28, September.
  13. Wing-Keung Wong & Robert B. Miller & Keshab Shrestha, 2002. "Maximum Likelihood Estimation of ARMA Model with Error Processes for Replicated Observations," Departmental Working Papers wp0217, National University of Singapore, Department of Economics.
  14. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  15. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  16. Andrew W. Lo & A. Craig MacKinlay, 1989. "When are Contrarian Profits Due to Stock Market Overreaction?," NBER Working Papers 2977, National Bureau of Economic Research, Inc.
  17. John H. Cochrane, 1988. "Production Based Asset Pricing," NBER Working Papers 2776, National Bureau of Economic Research, Inc.
  18. Wong, Wing-Keung & Li, Chi-Kwong, 1999. "A note on convex stochastic dominance," Economics Letters, Elsevier, vol. 62(3), pages 293-300, March.
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Cited by:
  1. Wing-Keung Wong & Meher Manzur & Boon-Kiat Chew, 2003. "How rewarding is technical analysis? Evidence from Singapore stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 13(7), pages 543-551.

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