The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns
A number of financial variables have been shown to be effective in explaining the time-series of aggregate returns in both the UK and US equity markets. These include, inter alia, the dividend yield, the spread between the yields on long and on short bonds, and lagged equity returns. Recently, however, the gilt-equity yield ratio -the ratio between the long bond yield and the equity dividend yield- has emerged as a variable that has considerable explanatory power for equity returns in the UK. This paper compares the performance of the gilt-Equity yield ratio with these other variables in the UK and US equity markets, prividing evidence on both ex post explanatory power and ex ante predictive ability.
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