Cookies?
Library Header Image
LSE Research Online LSE Library Services

Some historical perspectives on the Bond-Stock Earnings Yield Model for crash prediction around the world

Lleo, Sebastien and Ziemba, Bill (2014) Some historical perspectives on the Bond-Stock Earnings Yield Model for crash prediction around the world. SRC Discussion Paper (No 21). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

[img]
Preview
PDF
Download (7MB) | Preview

Abstract

We provide a historical perspective focusing on Ziemba's experiences and research on the bond-stock earnings yield differential model (BSEYD) starting from when he first used it in Japan in 1988 through to the present in 2014. The model has called many but not all crashes. Those called have high interest rates in long term bonds relative to the trailing earnings to price ratio. In general, when the model is in the danger zone, almost always there will be a crash. The model predicted the crashes in China, Iceland and the US in the 2006-9 period. Iceland had a drop of fully 95%. For the US the call was on June 14, 2007 and the stock market fell 56.8%. A longer term study for the US, Canada, Japan, Germany, and UK shows that over long periods being in the stock market when the bond-stock signal is not in the danger zone and in cash when it is in the danger zone provides a final wealth about double buy and hold for each of these five countries. The best use of the model is for predicting crashes. Finally we compare Shiller's high PE ratio crash model to the BSEYD model for the US market from 1962-2012. While both models add value, the BSEYD model predicts crashes better.

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 > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 16 Feb 2015 15:38
Last Modified: 09 Oct 2019 23:25
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/60960

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics