The fed model: The bad, the worse, and the ugly

Javier Estrada

The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 2, pages 214-238

Abstract: The negative relationship between stock market P/E ratios and government bond yields seems to have become conventional wisdom among practitioners. However, limited empirical evidence and a misleading suggestion that the model originated in the Fed are used to support the model's plausibility. This article argues that the Fed model is flawed from a theoretical standpoint and reports evidence from 20 countries that seriously questions its empirical merits. Despite its widespread use and acceptance, the Fed model is found to be a failure both as a normative and as a positive model of equity pricing.

Keywords: Fed; model; P/E; ratios; Interest; rates; Stock; market; valuation (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:quaeco:v:49:y:2009:i:2:p:214-238

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