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An international test of the Fed model

Author

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  • Samuel Aubert
  • Pierre Giot

    (University of Namur)

Abstract

In a way similar to Asness, this paper examines the effectiveness of earnings yields, as well as of their difference with long-term government bond yields (the so-called Fed model), to forecast real stock returns of various horizons in nine countries. Moreover, the same tests are repeated with dividend yields in place of earnings yields. Forecasting power is measured by using regression analysis. The results show that the traditional model is somewhat successful at forecasting long-term stock returns, whereas the Fed model is a failure.

Suggested Citation

  • Samuel Aubert & Pierre Giot, 2007. "An international test of the Fed model," Journal of Asset Management, Palgrave Macmillan, vol. 8(2), pages 86-100, July.
    • Handle: RePEc:pal:assmgt:v:8:y:2007:i:2:d:10.1057_palgrave.jam.2250063
    DOI: 10.1057/palgrave.jam.2250063
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    References listed on IDEAS

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    1. Alain Durré & Pierre Giot, 2007. "An International Analysis of Earnings, Stock Prices and Bond Yields," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 613-641, April.
    2. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Inflation Illusion and Stock Prices," American Economic Review, American Economic Association, vol. 94(2), pages 19-23, May.
    3. Lansing, Kevin, 2005. "Inflation-Induced Valuation Errors in the Stock Market," Journal of Financial Transformation, Capco Institute, vol. 13, pages 124-126.
    4. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 639-668.
    5. Ritter, Jay R. & Warr, Richard S., 2002. "The Decline of Inflation and the Bull Market of 1982–1999," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(1), pages 29-61, March.
    6. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
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    Cited by:

    1. Alexander David & Pietro Veronesi, 2009. "What Ties Return Volatilities to Price Valuations and Fundamentals?," NBER Working Papers 15563, National Bureau of Economic Research, Inc.

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