In this paper we present estimates indicating that there is a long run equilibrium relationship between the earnings yield on stocks and the yield on 10-year Treasury bonds and that this equilibrium relationship implies co-breaking with forward earnings growth. We are also able to show that this co-breaking relationship works in the same way with a variable which has been shown to relate the variation through time of risk premia to business conditions. Our approach is similar to Krolzig and Toro [2004. Decision Support Systems 37, 531– 542] who demonstrate that the present value theory implies co-breaking of Bond-Equity Yield Ratio (BEYR) and dividend growth. In our paper we analyse if this result can be proven also for the so called Fed model, which is a variant of BEYR. We provide an empirical analysis of the validity of this hypothesis in the United States for the time period 1979.1-2005.8. Comparing the results with a linear VAR and with alternative formulations of Markov switching VAR (MS-VARX and MS-DVAR), we find that co-breaking of the bond-equity yield equilibrium ratio and forward earnings growth or a variable that proxy for changes in risk premium, shows a superior ability to describe bull and bear cycles in the stock market.
Co-breaking in the bond-equity yield equilibrium model: an empirical analysis for the United States
BINOTTI, ANNETTA MARIA;
2010-01-01
Abstract
In this paper we present estimates indicating that there is a long run equilibrium relationship between the earnings yield on stocks and the yield on 10-year Treasury bonds and that this equilibrium relationship implies co-breaking with forward earnings growth. We are also able to show that this co-breaking relationship works in the same way with a variable which has been shown to relate the variation through time of risk premia to business conditions. Our approach is similar to Krolzig and Toro [2004. Decision Support Systems 37, 531– 542] who demonstrate that the present value theory implies co-breaking of Bond-Equity Yield Ratio (BEYR) and dividend growth. In our paper we analyse if this result can be proven also for the so called Fed model, which is a variant of BEYR. We provide an empirical analysis of the validity of this hypothesis in the United States for the time period 1979.1-2005.8. Comparing the results with a linear VAR and with alternative formulations of Markov switching VAR (MS-VARX and MS-DVAR), we find that co-breaking of the bond-equity yield equilibrium ratio and forward earnings growth or a variable that proxy for changes in risk premium, shows a superior ability to describe bull and bear cycles in the stock market.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
