IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789814405461_0020.html
   My bibliography  Save this book chapter

The Predictive Ability of the Bond-Stock Earnings Yield Differential Model

In: Calendar Anomalies And Arbitrage

Author

Listed:
  • KLAUS BERGE

    (Allianz SE in Munich, Germany)

  • GIORGIO CONSIGLI

    (Department of Mathematics, Statistics, and Computer Science at the University of Bergamo in Bergamo, Italy)

  • WILLIAM T. ZIEMBA

Abstract

The Federal Reserve (Fed) model provides a framework for discussing stock market over- and undervaluation. It was introduced by market practitioners after Alan Greenspan’s speech on the market’s irrational exuberance in November 1996 as an attempt to understand and predict variations in the equity risk premium (ERP). The model relates the yield on stocks (measured by the ratio of earnings to stock prices) to the yield on nominal Treasury bonds. The theory behind the Fed model is that an optimal asset allocation between stocks and bonds is related to their relative yields and when the bond yield is too high, a market adjustment is needed resulting in a shift out of stocks into bonds. If the adjustment is large, it causes an equity market correction (a decline of 10% within one year); hence. there is a short-term negative ERP. The model predicted the 1987 US., 1990 Japan, 2000 US., and 2002 US. corrections…

Suggested Citation

  • Klaus Berge & Giorgio Consigli & William T. Ziemba, 2012. "The Predictive Ability of the Bond-Stock Earnings Yield Differential Model," World Scientific Book Chapters, in: Calendar Anomalies And Arbitrage, chapter 20, pages 445-462, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814405461_0020
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789814405461_0020
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789814405461_0020
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789814405461_0020. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.