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

Lleo, Sebastien and Ziemba, William T. (2014) Does the bond-stock earning yield differential model predict equity market corrections better than high P/E models? SRC Discussion Paper (No 18). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

In this paper, we extend the literature on crash prediction models in three main respects. First, we relate explicitly crash prediction measures and asset pricing models. Second, we present a simple, effective statistical significance test for crash prediction models. Finally, we propose a definition and a measure of robustness for crash prediction models. We apply the 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 suggests that the BSEYD, the logarithmic BSEYD model, and to a lesser extent the P/E ratio, are statistically significant robust predictors of equity market crashes.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2014 Systemic Risk Centre, The London School of Economics and Political Science
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 29 Aug 2014 10:43
Last Modified: 06 May 2019 23:20
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/59290

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