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Does the BEYR help predict UK sector returns?

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  • David G McMillan

    (School of Management, University of St Andrews)

Abstract

This article sets out to examine the predictive content of the bond-equity yield ratio (BEYR) for sector-level stock returns. Initial results using the Hoare–Govett rule suggest that for the vast majority of sectors an increase in returns over a buy and hold strategy can be made by using the BEYR as a market-timing rule. Further, by estimating a non-linear model consistent with the reverting features of the ratio and one that is able to directly estimate the threshold points to determine switching between buy and sell signals for equity allows for an improved performance, and suggests that further enhanced trading returns can be made. As a final exercise, a panel estimation approach both for the BEYR itself and for predicting sector returns again support the use of the BEYR as a predictor for returns, and that a non-linear approach is superior to the linear model. In addition, the results here suggest that the BEYR is a predictor of sector stock returns. Moreover, its market-timing power is enhanced when estimated in a non-linear model that estimates the threshold values to determine switching between buy and sell signals. The results here are thus of potential interest not only to academics concerned with issues of market predictability and efficiency, but also to market practitioners in devising trading strategies.

Suggested Citation

  • David G McMillan, 2011. "Does the BEYR help predict UK sector returns?," Journal of Asset Management, Palgrave Macmillan, vol. 12(2), pages 146-156, June.
    • Handle: RePEc:pal:assmgt:v:12:y:2011:i:2:d:10.1057_jam.2011.3
    DOI: 10.1057/jam.2011.3
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    Cited by:

    1. Giulia Dal Pra & Massimo Guidolin & Manuela Pedio & Fabiola Vasile, 2016. "Do Regimes in Excess Stock Return Predictability Create Economic Value? An Out-of-Sample Portfolio Analysis," BAFFI CAREFIN Working Papers 1637, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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