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

Sebastien Lleo and William T. Ziemba

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this paper, we extend the literature on crash prediction models in three main respects. First, we relate explicitly crash prediction measures and asset pricing models. Second, we present a simple, effective statistical significance test for crash prediction models. Finally, we propose a definition and a measure of robustness for crash prediction models. We apply the 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 suggests that the BSEYD, the logarithmic BSEYD model, and to a lesser extent the P/E ratio, are statistically significant robust predictors of equity market crashes.

Keywords: stock market crashes; bond-stock earnings yield mode; Fed model; price-earnings-ratio (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G15 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2014-08-17
New Economics Papers: this item is included in nep-fmk and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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