IDEAS home Printed from https://ideas.repec.org/p/sce/scecf4/6.html
   My bibliography  Save this paper

Forecasting the Bond-Equity Yield Ratio Using Regime Switching and Cointegration Models: An international Comparison

Author

Listed:
  • Mikael Petitjean
  • Pierre Giot

Abstract

The bond-equity yield ratio is defined as the ratio of the coupon yield on long government bonds to the dividend yield on equity. Commonly named in the UK as the gilt-equity yield ratio (GEYR), it has been argued to capture the relative value of bonds and equities through the di fferential in their income yield. While Brooks and Persand (2001) have been the first to endogenise the threshold at which the ratio switches from being high or low and vice versa, they just use one single trading rule based on the one-step ahead forecasted value of the ratio, for three di fferent countries. We add another trading rule based on the one-step ahead forecasted probability of being in the high (or low) regime and extend the sample to seven countries, including Japan, the Netherlands, Belgium and France. We also use another methodological approach based on cointegration analysis since stock index prices, dividends and interest rates may be found to have a stationary long-term relationship. We finally conclude by comparing the forecasting ability of these two approaches with classical models such as Random Walk with drift, SETAR, MA(1)-GARCH and AR(p)

Suggested Citation

  • Mikael Petitjean & Pierre Giot, 2004. "Forecasting the Bond-Equity Yield Ratio Using Regime Switching and Cointegration Models: An international Comparison," Computing in Economics and Finance 2004 6, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:6
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Keywords

    Equity Yield; GEYR; Markov Switching; Regime Model; Forecasting; Cointegration;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:6. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/sceeeea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.