Stock Market Crashes in 2007-2009: Were We Able to Predict Them?
63 Pages Posted: 12 Jul 2011 Last revised: 18 Mar 2012
Date Written: July 11, 2011
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
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