Do the spreads between the E/P ratio and interest rates contain information on future equity market movements?

Douglas Rolph () and Pu Shen

No 99-03, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We examine the usefulness of the spreads between the e/p ratio of the S&P 500 index and the yields on 3-month and 10-year Treasury securities as indicators of future market conditions. We find that while spreads are not particularly useful in a regression framework, the extreme values of the spreads do contain information on the market outlook. Specifically, for the period of 1967 to 1997, portfolios that only invested in the stock index when the spreads were above their historical tenth percentile levels produced higher average returns (not statistically significant) and lower variances (statistically significant) than the stock index.

Keywords: Interest rates; Stock market (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-fin
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