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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.

Suggested Citation

  • Alain Durré & Pierre Giot, 2005. "An international analysis of earnings, stock prices and bond yields," Working Paper Research 73, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:200509-1

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    References listed on IDEAS

    1. Joel Lander & Athanasios Orphanides & Martha Douvogiannis, "undated". "Earnings Forecasts and the Predictability of Stock Returns: Evidence from Trading the S&P;," Finance and Economics Discussion Series 1997-06, Board of Governors of the Federal Reserve System (U.S.).
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    3. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-676, July.
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    5. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 639-668.
    6. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
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    9. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
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    11. 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 1062-1088, October.
    12. Lansing, Kevin, 2005. "Inflation-Induced Valuation Errors in the Stock Market," Journal of Financial Transformation, Capco Institute, vol. 13, pages 124-126.
    13. Mills, Terence C, 1991. "Equity Prices, Dividends and Gilt Yields in the UK: Cointegration, Error Correction and 'Confidence.'," Scottish Journal of Political Economy, Scottish Economic Society, vol. 38(3), pages 242-255, August.
    14. 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.
    15. Boudoukh, Jacob & Richardson, Matthew, 1993. "Stock Returns and Inflation: A Long-Horizon Perspective," American Economic Review, American Economic Association, vol. 83(5), pages 1346-1355, December.
    16. Ritter, Jay R. & Warr, Richard S., 2002. "The Decline of Inflation and the Bull Market of 1982–1999," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(01), pages 29-61, March.
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    Cited by:

    1. Joseph Friedman & Yochanan Shachmurove, 2005. "European Stock Market Dynamics Before and After the Introduction of the Euro," PIER Working Paper Archive 05-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. repec:rfa:aefjnl:v:4:y:2017:i:6:p:107-115 is not listed on IDEAS
    3. Pierre Giot & Mikael Petitjean, 2009. "Short-term market timing using the bond-equity yield ratio," The European Journal of Finance, Taylor & Francis Journals, vol. 15(4), pages 365-384.
    4. Giot, Pierre & Petitjean, Mikael, 2007. "The information content of the Bond-Equity Yield Ratio: Better than a random walk?," International Journal of Forecasting, Elsevier, vol. 23(2), pages 289-305.
    5. Guglielmo Caporale & Luis Gil-Alana, 2014. "Fractional integration and cointegration in US financial time series data," Empirical Economics, Springer, vol. 47(4), pages 1389-1410, December.
    6. Shakizada Niyazbekova & Igor Grekov & Tatiana Blokhina, 2016. "The Influence Of Macroeconomic Factors To The Dynamics Of Stock Exchange In The Republic Of Kazakhstan," Economy of region, Centre for Economic Security, Institute of Economics of Ural Branch of Russian Academy of Sciences, vol. 1(4), pages 1263-1273.
    7. Jokivuolle, Esa & Keppo, Jussi & Yuan, Xuchuan, 2015. "Bonus caps, deferrals and bankers' risk-taking," Research Discussion Papers 5/2015, Bank of Finland.
    8. Geert Langenus, 2006. "Fiscal sustainability indicators and policy design in the face of ageing," Working Paper Research 102, National Bank of Belgium.
    9. Jokivuolle, Esa & Keppo, Jussi, 2014. "Bankers' compensation: : Sprint swimming in short bonus pools?," Research Discussion Papers 2/2014, Bank of Finland.
    10. repec:bof:bofrdp:urn:nbn:fi:bof-201503041096 is not listed on IDEAS

    More about this item


    stock indexes; earnings; long-run relationships; interest rates; inflation; market valuation;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading


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