Does the Bond‐Stock Earnings Yield Differential Model Predict Equity Market Corrections Better than High P/E Models?

63 Pages Posted: 13 Apr 2017

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: May 2017

Abstract

We extend the literature on crash prediction models in three main ways. First, we explicitly relate crash prediction measures and asset pricing models. Second, we present a statistical significance test for crash prediction models. Finally, we propose a definition and a measure of robustness for these models. We apply our statistical test and measure the robustness of selected model specifications of the Price‐Earnings (P/E) ratio and Bond Stock Earning Yield Differential (BSEYD) measures. This analysis shows that the BSEYD and P/E ratios, were statistically significant robust predictors of corrections on the US equity market over the period 1964 to 2014.

Keywords: stock market crashes, bond‐stock earnings yield mode, Fed model, price‐earnings‐ratio

JEL Classification: G14, G15, G12, G10

Suggested Citation

Lleo, Sebastien and Ziemba, William T., Does the Bond‐Stock Earnings Yield Differential Model Predict Equity Market Corrections Better than High P/E Models? (May 2017). Financial Markets, Institutions & Instruments, Vol. 26, Issue 2, pp. 61-123, 2017, Available at SSRN: https://ssrn.com/abstract=2952106 or http://dx.doi.org/10.1111/fmii.12080

Sebastien Lleo (Contact Author)

NEOMA Business School ( email )

Reims
France

William T. Ziemba

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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