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Does the bond‐stock earnings yield differential model predict equity market corrections better than high P/E models?

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  • Sébastien Lleo
  • William T. Ziemba

Abstract

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 statistical significance test for crash prediction models. Finally, we propose a definition and a measure of robustness for these 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 and P/E ratios, were statistically significant robust predictors of corrections on the US equity market over the period 1964 to 2014.

Suggested Citation

  • Sébastien Lleo & William T. Ziemba, 2017. "Does the bond‐stock earnings yield differential model predict equity market corrections better than high P/E models?," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 26(2), pages 61-123, May.
    • Handle: RePEc:wly:finmar:v:26:y:2017:i:2:p:61-123
    DOI: 10.1111/fmii.12080
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