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An international analysis of earnings, stock prices and bond yields

  • Alain Durré

    ()

    (National Bank of Belgium, Research Department
    European Central Bank
    Catholic University of Lille (France), IESEG)

  • Pierre Giot

    ()

    (University of Namur, Departement of Business Administration & CEREFIM
    Université catholique de Louvain, CORE)

This paper assesses the possible contemporaneous relationship between stock index prices, earnings and long-term government bond yields for a large number of countries and over a time period that spans several decades. In a cointegration framework, our analysis looks at three hypotheses. First, is there a long-term contemporaneous relationship between earnings, stock prices and government bond yields? Second, does a deviation from this possible long-run equilibrium impact stock prices such that the equilibrium is restored? Third, do government bond yields play a significant role in the long-run relationship or does the latter only involve stock prices and earnings? We also study the short-term impact of changes in long-term government bond yields on stock prices and discuss our short-term and long-term results in light of the recent developments regarding the so-called Fed model.

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/WP73.pdf
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Paper provided by National Bank of Belgium in its series Working Paper Research with number 73.

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Length: 53 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:nbb:reswpp:200509-1
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  1. Richard D.F. Harris & Rene Sanchez-Valle, 2000. "The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3&4), pages 333-357.
  2. Carlo A. Favero & Federico Mosca, . "Uncertainty on Monetary Policy and the Expectations Model of the Term Structure of Interest Rates," Working Papers 179, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
  4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  5. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," NBER Working Papers 11018, National Bureau of Economic Research, Inc.
  6. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  7. S. I. Spyrou, 2004. "Are stocks a good hedge against inflation? evidence from emerging markets," Applied Economics, Taylor & Francis Journals, vol. 36(1), pages 41-48.
  8. Joel Lander & Athanasios Orphanides & Martha Douvogiannis, 1997. "Earnings forecasts and the predictability of stock returns: evidence from trading the S&P," Finance and Economics Discussion Series 1997-6, Board of Governors of the Federal Reserve System (U.S.).
  9. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
  10. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
  11. MacDonald, Ronald & Power, David, 1995. "Stock prices, dividends and retention: Long-run relationships and short-run dynamics," Journal of Empirical Finance, Elsevier, vol. 2(2), pages 135-151, June.
  12. Levin, Eric J & Wright, Robert E, 1998. "The Information Content of the Gilt-Equity Yield Ratio," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(0), pages 89-101, Supplemen.
  13. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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