Cointegration analysis of the Fed model

Matti Koivu, Teemu Pennanen and William T. Ziemba
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Matti Koivu: Risk Managemelll Division, European Central Bank, D-60311 Frankfurt am Main, Germany
Teemu Pennanen: Department of Management Science, Helsinki School of Economics, 00101 Helsinki, Finland
William T. Ziemba: Sauder School of Business, University of British Columbia, Vancouver, B.C., V6T 1Z2, Canada and Sloan School of Management, Massachusells Institute of Technology. Cambridge, MA 02142, USA

Chapter 19 in Calendar Anomalies and Arbitrage, 2012, pp 433-444 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe Fed model postulates that the equity earnings yield follows the bond yield in the long run. Our tests based on a cointegration analysis of the United States, United Kingdom and German data indicate that the Fed model has predictive power in forecasting changes in the equity prices, earnings and bond yields. The predictions are better in the US than in other countries. Our approach consists of building a Vector Equilibrium Correction model which provides a quantitative dynamic version of the Fed model.

Keywords: Calendar Anomalies; Arbitrage; Stock Prices; Stock Returns; US Stock Market; Futures Markets; Betting; Trading Strategies; Sports Market; Lottery Market; Capital Growth Theory; Semi-Strong Market Efficiency; Speculative Investments; Index Futures; Factor Models Based on Fundamental Anomalies; Worldwide Stock Market Strategies (search for similar items in EconPapers)
Date: 2012
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