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

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  • GIOT, Pierre
  • PETITJEAN, Mikael

Abstract

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.

Suggested Citation

  • GIOT, Pierre & PETITJEAN, Mikael, 2005. "Dynamic asset allocation between stocks and bonds using the Bond-Equity Yield Ratio," LIDAM Discussion Papers CORE 2005010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2005010
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2005.html
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    Cited by:

    1. Helena Chuliá & Hipòlit Torró, 2008. "The economic value of volatility transmission between the stock and bond markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(11), pages 1066-1094, November.

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