Abstract
We put forward the Bond-Equity Yield Ratio (BEYR) as a criterium to dynamically allocate capital between equities and bonds on a short-term basis. Relying upon 30 years of monthly data for a large collection of countries, we use the cointegration, regimeswitching and ARMA-GARCH type methodologies to model and forecast the BEYR. While no model systematically beats the random walk from a statistical point of view, the out-of-sample forecasts show that the regime-switching model based on the forecasted probability generates the best and most consistent trading performance. A strategy based on the distribution percentiles is also consistent in its ability to outperform the buy-andhold strategies. All in all, the BEYR is a remarkable relative market pricing tool in the US as it delivers higher risk-adjusted returns than the equity yield on a short-term basis.
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