Stock Market Crashes in 2007-2009: Were We Able to Predict Them?

63 Pages Posted: 12 Jul 2011 Last revised: 18 Mar 2012

See all articles by Sebastien Lleo

Sebastien Lleo

NEOMA Business School

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business; Systemic Risk Centre - LSE

Date Written: July 11, 2011

Abstract

We investigate the stock market crashes in China, Iceland, and the US in the 2007-2009 period. The bond stock earnings yield difference model is used as a prediction tool. Historically, when the measure is too high, meaning that long bond interest rates are too high relative to the trailing earnings over price ratio, then there usually is a crash of 10% or more within four to twelve months. The model did in fact predict all three crashes. Iceland had a drop of fully 95%, China fell by two thirds and the US by 57%.

Keywords: stock market, crashes, efficient capital markets, China, Iceland

JEL Classification: G14, G15, G12, G10

Suggested Citation

Lleo, Sebastien and Ziemba, William T., Stock Market Crashes in 2007-2009: Were We Able to Predict Them? (July 11, 2011). Available at SSRN: https://ssrn.com/abstract=1884081 or http://dx.doi.org/10.2139/ssrn.1884081

Sebastien Lleo

NEOMA Business School ( email )

Reims
France

William T. Ziemba (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-261-1343 (Phone)
604-263-9572 (Fax)

HOME PAGE: http://williamtziemba.com

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom

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