Can Warren Buffett Forecast Equity Market Corrections?

39 Pages Posted: 14 Jul 2015 Last revised: 14 Jul 2017

Sebastien Lleo

NEOMA Business School

William T. Ziemba

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

Date Written: March 26, 2017

Abstract

Warren Buffett suggested that the ratio of the market value of all publicly traded stocks to the Gross National Product could identify potential overvaluations and undervaluations in the US equity market. We investigate whether this ratio is a statistically significant predictor of equity market corrections. We find that the static decision rule suggested by Buffett does not deliver satisfactory forecasts. However, when we adopt a time-varying decision rule, the ratio becomes a statistically significant predictor of equity market corrections. This new decision rule is robust to changes in its key parameters: the confidence level and the forecasting horizon.

Keywords: stock market crashes, equity markets, market value-to-GNP ratio, equity market, GNP, GDP, likelihood ratio test, Monte Carlo

JEL Classification: G14, G15, G12, G10

Suggested Citation

Lleo, Sebastien and Ziemba, William T., Can Warren Buffett Forecast Equity Market Corrections? (March 26, 2017). Available at SSRN: https://ssrn.com/abstract=2630068 or http://dx.doi.org/10.2139/ssrn.2630068

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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