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Discovery of the Bond–Stock Earnings Yield Differential Model

In: STOCK MARKET CRASHES Predictable and Unpredictable and What To Do About Them

Author

Listed:
  • William T. Ziemba
  • Sebastien Lleo
  • Mikhail Zhitlukhin

Abstract

We discuss the bond–stock earnings yield differential (BSEYD) model starting from when Ziemba first used it in Japan in 1988–89 in various countries. The model has called many but not all crashes. Those have high interest rates in the most liquid long-term bonds relative to the trailing earnings-to-price ratio (EP ratio). In general, when the model is in the danger zone, there will almost always be a crash. The model called the 2000 and 2002 US crashes. A long horizon study for the US, Canada, Japan, Germany, and UK shows that being in the stock market when the bond–stock signal is not in the danger zone and in cash when it is in the danger zone provides a final wealth about double buy and hold in these five countries during 1975–2000 or 1980–2000.

Suggested Citation

  • William T. Ziemba & Sebastien Lleo & Mikhail Zhitlukhin, 2017. "Discovery of the Bond–Stock Earnings Yield Differential Model," World Scientific Book Chapters, in: STOCK MARKET CRASHES Predictable and Unpredictable and What To Do About Them, chapter 2, pages 11-24, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813223851_0002
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    Keywords

    Stock Market Crashes; Brexit; Trump; Financial Bubbles;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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