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Cointegration analysis of the Fed model

In: Calendar Anomalies And Arbitrage

Author

Listed:
  • Matti Koivu

    (Risk Managemelll Division, European Central Bank, D-60311 Frankfurt am Main, Germany)

  • Teemu Pennanen

    (Department of Management Science, Helsinki School of Economics, 00101 Helsinki, Finland)

  • William T. Ziemba

    (Sauder School of Business, University of British Columbia, Vancouver, B.C., V6T 1Z2, Canada and Sloan School of Management, Massachusells Institute of Technology. Cambridge, MA 02142, USA)

Abstract

The Fed model postulates that the equity earnings yield follows the bond yield in the long run. Our tests based on a cointegration analysis of the United States, United Kingdom and German data indicate that the Fed model has predictive power in forecasting changes in the equity prices, earnings and bond yields. The predictions are better in the US than in other countries. Our approach consists of building a Vector Equilibrium Correction model which provides a quantitative dynamic version of the Fed model.

Suggested Citation

  • Matti Koivu & Teemu Pennanen & William T. Ziemba, 2012. "Cointegration analysis of the Fed model," World Scientific Book Chapters, in: Calendar Anomalies And Arbitrage, chapter 19, pages 433-444, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814405461_0019
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