Discovery of the Bond–Stock Earnings Yield Differential Model

William T. Ziemba, Sebastien Lleo and Mikhail Zhitlukhin

Chapter 2 in Stock Market Crashes:Predictable and Unpredictable and What to do About Them, 2017, pp 11-24 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We discuss the bond–stock earnings yield differential (BSEYD) model starting from when Ziemba first used it in Japan in 1988–89 in various countries. The model has called many but not all crashes. Those have high interest rates in the most liquid long-term bonds relative to the trailing earnings-to-price ratio (EP ratio). In general, when the model is in the danger zone, there will almost always be a crash. The model called the 2000 and 2002 US crashes. A long horizon study for the US, Canada, Japan, Germany, and UK shows that being in the stock market when the bond–stock signal is not in the danger zone and in cash when it is in the danger zone provides a final wealth about double buy and hold in these five countries during 1975–2000 or 1980–2000.

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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