The High Price–Earnings Stock Market Danger Approach of Campbell and Shiller versus the BSEYD Model

William T. Ziemba, Sebastien Lleo and Mikhail Zhitlukhin

Chapter 4 in Stock Market Crashes:Predictable and Unpredictable and What to do About Them, 2017, pp 55-132 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We show how to use Campbell and Shiller’s work on price-to-earnings (P/E) ratio and the predictability of long-term returns to create a crash prediction measure: the high P/E measure. Next, we present a statistical procedure to test the accuracy of crash prediction models. We use this procedure to test the accuracy of the bond–stock earnings yield differential (BSEYD) and high P/E models on a 51-year period on the US market, starting on January 1, 1962, and ending on December 31, 2014 (12,846 daily data points). At the end of the Chapter, we expand the analysis beyond the US market to look at the two main Chinese stock markets: Shanghai and Shenzhen. Material in this chapter is based on Lleo and Ziemba (2017) and Lleo and Ziemba (2016c).

Keywords: Stock Market Crashes; Brexit; Trump; Financial Bubbles (search for similar items in EconPapers)
JEL-codes: F30 (search for similar items in EconPapers)
Date: 2017
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