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An International Analysis of Earnings, Stock Prices and Bond Yields

Listed author(s):
  • Alain Durré
  • Pierre Giot

This paper assesses the contemporaneous relationship between stock prices, earnings and long-term government bond yields for a large number of countries. The time period of our data spans several decades. In a time series framework our analysis first tests the presence of a long-term contemporaneous relationship between these three variables (the so-called Fed model). Next, we assess if government bond yields play a significant role in the long-run relationship. Our empirical results question the validity of the Fed model in the sense that we show that long-term market movements are mainly driven by the earnings yield and not the differential between bond and earnings yields. As such, our analysis validates the results of Asness (2003) for a much larger collection of countries while using a dynamic time series (cointegration) framework. Finally, we also show that changes in long-term government bond yields have a short-term impact on stock prices. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 34 (2007-04)
Issue (Month): 3-4 ()
Pages: 613-641

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Handle: RePEc:bla:jbfnac:v:34:y:2007-04:i:3-4:p:613-641
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  1. Joel Lander & Athanasios Orphanides & Martha Douvogiannis, "undated". "Earnings Forecasts and the Predictability of Stock Returns: Evidence from Trading the S&P;," Finance and Economics Discussion Series 1997-06, Board of Governors of the Federal Reserve System (U.S.).
  2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
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  11. Richard D.F. Harris & Rene Sanchez-Valle, 2000. "The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3-4), pages 333-357.
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  15. Lansing, Kevin, 2005. "Inflation-Induced Valuation Errors in the Stock Market," Journal of Financial Transformation, Capco Institute, vol. 13, pages 124-126.
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