The Bond–Stock Earnings Yield Crash Prediction Model

William T Ziemba

Chapter 14 in The Adventures of a Modern Renaissance Academic in Investing and Gambling, 2017, pp 147-158 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The crash model prediction project worked well. There was no US literature on the topic, just data on crashes. In looking at the 1987 stock market crash, I quickly came up with the bond–stock earnings yield model (BSEYD). The idea is simple: bonds and stocks compete for the money. When interest rates are high, the money goes to bonds and when they are low it goes to stocks. Of course, no simple or even complex model works all the time, but I have found over the years 1948–2016 that this BSEYD model is very useful for at least two things. First, it is very good at predicting stock market crashes. Secondly, it is good at indicating when to be in and when to be out of the stock market for long-term investors…

Keywords: Financial History; Risk Management; Investment Strategies; Mean Reversion; Risk Arbitrage; Management of Assets (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2017
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