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Is the Gilt-Equity Yield Ratio Useful for Predicting UK Stock Returns?

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  • Clare, A D
  • Thomas, S H
  • Wickens, M R

Abstract

The ratio of a long government bond yield to the equity market dividend yield, the gilt-equity yield ratio, is commonly used by analysts in the United Kingdom as a means of determining the cheapness of equity investment relative to investment in gilts. Analysts use the ratio to predict future movements in equity prices using buy/sell thresholds, implicitly assuming that there is a long-run arbitrage relation between the equity market and the government bond market. A formal econometric analysis confirms that the gilt-equity yield ratio is indeed a useful predictor of equity returns in the United Kingdom. Copyright 1994 by Royal Economic Society.

Suggested Citation

  • Clare, A D & Thomas, S H & Wickens, M R, 1994. "Is the Gilt-Equity Yield Ratio Useful for Predicting UK Stock Returns?," Economic Journal, Royal Economic Society, vol. 104(423), pages 303-315, March.
    • Handle: RePEc:ecj:econjl:v:104:y:1994:i:423:p:303-15
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