An International Analysis of Earnings, Stock Prices and Bond Yields

29 Pages Posted: 4 Jun 2007

See all articles by Alain Durré

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Pierre Giot

Facultés Universitaires Notre-Dame de la Paix (FUNDP)

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Abstract

This paper assesses the contemporaneous relationship between stock prices, earnings and long-term government bond yields for a large number of countries. The time period of our data spans several decades. In a time series framework our analysis first tests the presence of a long-term contemporaneous relationship between these three variables (the so-called Fed model). Next, we assess if government bond yields play a significant role in the long-run relationship. Our empirical results question the validity of the Fed model in the sense that we show that long-term market movements are mainly driven by the earnings yield and not the differential between bond and earnings yields. As such, our analysis validates the results of Asness (2003) for a much larger collection of countries while using a dynamic time series (cointegration) framework. Finally, we also show that changes in long-term government bond yields have a short-term impact on stock prices.

Suggested Citation

Durre, Alain C. J. and Giot, Pierre, An International Analysis of Earnings, Stock Prices and Bond Yields. Journal of Business Finance & Accounting, Vol. 34, No. 3-4, pp. 613-641, April/May 2007, Available at SSRN: https://ssrn.com/abstract=990909 or http://dx.doi.org/10.1111/j.1468-5957.2007.02010.x

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

Pierre Giot (Contact Author)

Facultés Universitaires Notre-Dame de la Paix (FUNDP) ( email )

Rempart de la Vierge 8
B-5000 Namur
Belgium

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