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Dynamic asset allocation between stocks and bonds using the Bond-Equity Yield Ratio

Listed author(s):
  • GIOT, Pierre
  • PETITJEAN, Mikael

We put forward the Bond-Equity Yield Ratio (BEYR) as a criterium to dynamically allocate capital between equities and bonds on a short-term basis. Relying upon 30 years of monthly data for a large collection of countries, we use the cointegration, regimeswitching and ARMA-GARCH type methodologies to model and forecast the BEYR. While no model systematically beats the random walk from a statistical point of view, the out-of-sample forecasts show that the regime-switching model based on the forecasted probability generates the best and most consistent trading performance. A strategy based on the distribution percentiles is also consistent in its ability to outperform the buy-andhold strategies. All in all, the BEYR is a remarkable relative market pricing tool in the US as it delivers higher risk-adjusted returns than the equity yield on a short-term basis.

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File URL: http://alfresco.uclouvain.be/alfresco/download/attach/workspace/SpacesStore/ab250a18-01e2-405f-b328-09e4f896ac01/coredp_2005_10.pdf
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2005010.

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Date of creation: 00 Feb 2005
Handle: RePEc:cor:louvco:2005010
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