Is the Gilt-Equity Yield Ratio Useful for Predicting UK Stock Returns?

A D Clare, S H Thomas and Michael Wickens

Economic Journal, 1994, vol. 104, issue 423, 303-15

Abstract: The ratio of a long government bond yield to the equity market dividend yield, the gilt-equity yield ratio, is commonly used by analysts in the United Kingdom as a means of determining the cheapness of equity investment relative to investment in gilts. Analysts use the ratio to predict future movements in equity prices using buy/sell thresholds, implicitly assuming that there is a long-run arbitrage relation between the equity market and the government bond market. A formal econometric analysis confirms that the gilt-equity yield ratio is indeed a useful predictor of equity returns in the United Kingdom. Copyright 1994 by Royal Economic Society.

Date: 1994
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