Does the bond‐stock earnings yield differential model predict equity market corrections better than high P/E models?

Sebastien Lleo and William T. Ziemba

Financial Markets, Institutions & Instruments, 2017, vol. 26, issue 2, 61-123

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.

Date: 2017
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https://doi.org/10.1111/fmii.12080

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Persistent link: https://EconPapers.repec.org/RePEc:wly:finmar:v:26:y:2017:i:2:p:61-123

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