Does the Bond-Stock Earning Yield Differential Model Predict Equity Market Corrections Better than High P/E Models?

112 Pages Posted: 22 Jul 2013 Last revised: 5 May 2015

See all articles by Sebastien Lleo

Sebastien Lleo

NEOMA Business School

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business

Date Written: May 4, 2015

Abstract

In this paper, we extend the literature on crash prediction models in three main ways. First, we explicitly relate 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 our 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 shows that the BSEYD, the logarithmic BSEYD model, and to a lesser extend the P/E ratio, were statistically significant robust predictors of corrections on the US equity market over the period 1964 to 2014.

Keywords: stock market corrections, bond-stock earnings yield model, FED model, price earnings ratio, Campbell and Shiller model

JEL Classification: G14, G15, G12, G10

Suggested Citation

Lleo, Sebastien and Ziemba, William T., Does the Bond-Stock Earning Yield Differential Model Predict Equity Market Corrections Better than High P/E Models? (May 4, 2015). Available at SSRN: https://ssrn.com/abstract=2296836 or http://dx.doi.org/10.2139/ssrn.2296836

Sebastien Lleo (Contact Author)

NEOMA Business School ( email )

Reims
France

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-261-1343 (Phone)
604-263-9572 (Fax)

HOME PAGE: http://williamtziemba.com

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