The Predictive Ability of the Bond Stock Earnings Yield Differential in World-wide Equity Markets

Abstract

This paper examines the predictive ability of the spread between the yield on long-term government bonds and the earnings yield of the overall stock market in the US, Germany, Canada, the UK and Japan for the period from 1970 to 1999. The results show that there is a relationship between this measure and the subsequent performance of the stock market at least for extreme values of this spread. This relationship can be exploited to achieve a better performance than a buy-and-hold investment in the stock market. Most of the results are both statistically and economically significant.