Abstract

http://ssrn.com/abstract=626695
 
 

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The Trading Profitability of Forecasts of the Gilt-Equity Yield Ratio


Chris Brooks


University of Reading - ICMA Centre

Gita Persand


University of Bristol - Department of Economics


International Journal of Forecasting, Vol. 17, pp. 11-29, 2001

Abstract:     
Research has highlighted the usefulness of the Gilt-Equity Yield Ratio (GEYR) as a predictor of UK stock returns. This paper extends recent studies by endogenising the threshold at which GEYR switches from being low to being high or vice versa, thus improving the arbitrary nature of the determination of the threshold employed in the extant literature. It is observed that a decision rule for investing in equities or bonds, based on the forecasts from a regime switching model, yields higher average returns with lower variability than a static portfolio containing any combinations of equities and bonds. A closer inspection of the results reveals that the model has power to forecast when investors should steer clear of equities, although the trading profits generated are insufficient to outweigh the associated transactions costs.

Keywords: GEYR, Markov switching, regime model, forecasting, equity & bond returns, trading rule

JEL Classification: C22, G11

Accepted Paper Series


Not Available For Download

Date posted: December 4, 2004  

Suggested Citation

Brooks, Chris and Persand, Gita, The Trading Profitability of Forecasts of the Gilt-Equity Yield Ratio. International Journal of Forecasting, Vol. 17, pp. 11-29, 2001. Available at SSRN: http://ssrn.com/abstract=626695

Contact Information

Chris Brooks (Contact Author)
University of Reading - ICMA Centre ( email )
Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)
Gita Persand
University of Bristol - Department of Economics ( email )
8 Woodland Road
Bristol BS8 ITN
United Kingdom
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