Equity Yield Research Articles

A consumption-based term structure model of bonds and equity

In this study, I propose a consumption-based asset pricing model to capture the dynamic properties of term structures of bonds and equity. I extend the long-run risks model by introducing a mean-reversion of dividend growth and the external habit formation of a representative agent. The mean-reverting dividend growth generates a negative equity term premium, while the habit formation augments the equity premium and renders an upward-sloping bond yield curve, on average. In addition, fluctuations in the surplus consumption ratio and the conditional variance of consumption growth allow the model to reproduce pro-cyclical variations in bond and equity yield spreads and counter-cyclical variations in bond and equity term premiums, as observed in the U.S. data.

The term structure of equity yields—a bottom-up approach

Abstract This article proposes a novel perspective on the term structure of market equity yields. Instead of using market dividend futures, we aggregate equity yields of individual firms to estimate the market equity yield curve. This approach allows studying the aggregation effect that shapes the market equity yield curve. During the period from 1990 to 2019, we find a positive aggregation effect: companies with high equity yields were expected to grow at higher rates than companies with low equity yields. Thus, high-yield companies were expected to generate an increasing share of total market dividends when expanding the investment time horizon. Under the assumption of flat firm-risk premia, this implies an upward-sloping term structure of equity risk premia. Together with the concave bond yield curve, the market equity yield curve was upward-sloping.

Estimating an Equity Yield to Maturity: Deficiencies of the Implied Cost of Capital (ICC) and an Alternative

Estimating an Equity Yield to Maturity: Deficiencies of the Implied Cost of Capital (ICC) and an Alternative

Determination Yield To Maturity Bonds, Audit Quality As Moderators

Yield to maturity bonds are often used by investors in the effort to obtain mutual returns from investments and reduce the mismatch of the acquisition value obtained. Several factors that influence it such as exchange rates, inflation, BI interest rates, debt to equity ratio, and company size are also to examine the effect of audit quality in moderating the relationship. The purpose of this study was to determine how the influence of exchange rates, inflation, BI interest rates, debt to equity ratio, and company size also when moderated by audit quality. Audit quality as a moderator is taken as a means of increasing public trust, especially investors. The research sample is corporate companies that issued bonds on the Indonesia Stock Exchange in 2014 - 2018, as many as 103 companies with emissions that met the research requirements of 110 emissions. The method used is purposive sampling and multiple linear regression techniques. The results showed a correlation between the rate of return with yield to maturity, there were 3 significant influences namely the exchange rate moderated by audit quality, company size and company size moderated by audit quality. This research model based on the determinant test results was able to explain the dependent variable by 55.9% while 44.1% was explained by other dependent variables by 55.9% while 44.1% was explained by other variables. Keywords: Exchange Rate, BI Rate, Debt to Equity Ratio, Size, and Yield to Maturity Bonds.

THE ANALYSIS OF FINANCIAL RATIOS EFFECT ON THE STOCK PRICE OF CONSUMER GOODS SECTOR COMPANIES LISTED IN KOMPAS100 INDEX

This research aims to discern the effect of financial ratios on the stock price of Consumer Goods Industry Sector Companies listed in Kompas 100 Index on 2013-2019 period, partially or simultaneously. The financial ratios analyzed in this research are: Current Ratio (CR), Net Profit Margin (NPM), Return on Equity (ROE) and Dividend Yield (DY). The research population is the Consumer Goods Industry Sector Companies listed in Kompas 100 Index on 2013-2019 period. There are 5 Consumer Goods Industry companies used as the research sample by applying the purposive sampling method. This research uses documentation as the collection data technique as well as a panel data as the data analysis technique. This research shows that NPM variable has a partially positive relationship on the stock price, ROE has a positive relationship on the stock price at a confidence level of 90 percent, while CR and DY have no effects on stock price. The CR, NPM, ROE and DY variables influence the stock price simultaneously. CR, NOM, ROE and DY variables can explain the stock price on the Consumer Goods Industry Sector companies listed in Kompas 100 Index at 98,38%.

The Term Structure of Equity Yields - A Bottom-Up Approach

This paper proposes a new approach to estimate an expected market equity yield curve by aggregating equity yields of individual firms over the market. The firms' equity yields are estimated using the implied cost of capital approach. During the period from 1990 to 2019, the U.S. equity yield curve was, on average, upward-sloping. This is a result of the aggregation effect: companies with high equity yields were expected to grow at higher rates than companies with low equity yields. Thus, high-yield companies dominate the market when increasing the investment time horizon. Together with the usual concave shape of the term structure of interest rates, this generates an upward-sloping market equity yield curve.

Inferring Stock Duration Around FOMC Surprises: Estimates and Implications

AbstractDiscount rates affect stock prices directly via the discount-rate channel or indirectly via the cash-flow channel because expected future cash-flow growth varies with the discount rate. The traditional Macaulay duration captures the effect from the discount-rate channel. I propose a novel duration measure, the effective equity duration, to capture the effects from both channels. I estimate it around unexpected policies in the federal funds rates. I find that the equity yield curve is hump-shaped because expected future cash-flow growth increases with the discount rate. The effective equity duration captures information other than monetary policy risk.

Intermediary-Based Equity Term Structure

New empirical facts show that equity term premium is counter-cyclical, while the term structure of equity yield is pro-cyclical and switches sign between expansions and recessions. We decompose the term structure of equity yield into an equity term premium and a mean reversion component about the expected changes in future yields to understand this seemingly contradictive evidence. Although the first component is counter-cyclical, we show the second mean reversion component dominantly drives the pro-cyclical fluctuations of the overall equity yield curve. We propose a financial intermediary-based asset pricing model to quantitatively account for both facts simultaneously. In our model, the mean reversion component is endogenously driven by the time-varying tightness of the intermediaries' leverage constraint. We demonstrate that the cyclical pattern of equity term structure imposes a strong discipline on the speed of mean reversion of discount rate for any standard asset pricing models. In the standard calibration of long-run risks model Bansal and Yaron (2004) and habit model Campbell and Cochrane (1999), the mean reversion speed of discount rate is too slow to account for a negative correlation between equity yield curve and equity term premium.

Bond–Equity Yield Ratio Market Timing in Emerging Markets

This article investigates the market timing ability of the bond–equity yield ratio (BEYR) from an international investor perspective. Consolidating data on emerging markets, we document no major international evidence that BEYR-based investing strategies, namely extreme values, thresholds and moving averages, provide higher risk-adjusted returns than benchmark buy-and-hold portfolios. However, we develop new augmented BEYR indicators by introducing the notion of US bonds as a safe investment relative to emerging market stocks and bonds. Dynamic strategies based on our augmented BEYR indicators produce significant gains in risk-adjusted returns compared with traditional BEYR and buy-and-hold benchmark strategies. JEL Classifications: G11, G12, G15

The Behaviour of the Equity Yield and Its Relation with the Bond Yield: The Role of Inflation

Understanding the behaviour of the equity yield and its relation to the bond yield is important for portfolio managers and those engaged in modelling the interaction between asset classes. During the mid-1900s, the equity yield—which was previously greater than the bond yield—declined, while the bond yield rose and became higher. Research, seeking to understand this, put forward the view that stock and bond return volatility is key. Evidence from the 2000s suggest that the relative values of the equity and bond yield have flipped again, with the former now greater. Empirical evidence presented here shows that during such periods, the hypothesised relation between the equity yield and the bond yield and the two volatilities also changes, with the signs reversed. Moreover, there is noticeable variation in the coefficient values. This paper argues that the relative equity and bond yield values are, to a large extent, driven by inflation volatility. High inflation volatility persisted during the first half of the twentieth century when the equity yield was higher. This was followed by more benign inflation volatility when the bond yield became higher. Evidence for a long span of US data, and shorter German, Japanese, and UK data, suggests the recent rise in the equity yield is accompanied by an uptick in inflation volatility relative to its recent tranquillity.

A Keynesian contribution to the theory of equity yields

This paper offers a Keynesian theory, in a Stock-Flow Consistent framework, to understand equity returns and their links with economic growth and consumption decisions from a long-run perspective. The main features of such a theory can be summarised as follows. First, there is a negative relationship between Tobin’s q and economic growth. Second, the effect of economic growth on dividend yields and earnings growth is positive, but its effect on the growth in the number of shares is negative (i.e. a ‘dilution effect’), which makes the relationship between equity returns and economic growth undetermined a priori. Third, consumption decisions emerge as crucial drivers for shareholder profitability in the long-run. And fourth, in the post-Keynesian theory the equity yield is determined by aggregate demand, and no theory of risk is needed. Finally, the post-Keynesian theory will be compared against the mainstream financial theory, which features the famous risk-return nexus where asset returns are given by the volatility of the asset respect to consumption. It will be claimed that the use of risk for determining equity returns at the macroeconomic level is problematic, and that depending on the risk definition assumed, the risk-return relationship can be either positive or negative – being thus such a nexus of little theoretical significance and posing serious problems for mainstream finance.

ETFs vs Structured Notes: The Equity Yield Enhancement Puzzle

Under a particular low rates global context, the portfolio optimization question is more relevant than ever. This unveils more implicit problems which long-only investors face as well as monitor and control risks, satisfy regulatory requirements while seeking to translate a market anticipation into position in the simplest and the more comprehensible assets they can find to avoid unwanted technical downturn, and optimize their structure of fees.However, with a wide range of eligible asset classes, and under a diversification purpose, the portfolio optimization problem is often exceeded, including the aim of enhance yields in accordance with the portfolio structure and levels of hedging. This can be particularly relevant when traditional assets deliver a shifted conception of performance, meaning stocks can be invested for dividend yield and bonds for rate curve movements, and when volatility spikes obstruct a market long-term vision. This paper aims to introduce Exchange Traded Funds and structured notes as equity yield enhancement products, by presenting and confronting characteristics an investor have to focus when he seeks to find the product likely to match his needs.

BonddEquity Yield Ratio Market Timing in Emerging Markets

This paper investigates the market timing ability of the bond–equity yield ratio (BEYR) from an international investor perspective. Consolidating data on emerging markets, we document no major international evidence that BEYR-based investing strategies, namely extreme values, thresholds, and moving averages, provide higher risk-adjusted returns than benchmark buy-and-hold portfolios. However, we develop new augmented BEYR indicators by introducing the notion of U.S. bonds as a safe investment relative to emerging market stocks and bonds. Dynamic strategies based on our augmented BEYR indicators produce significant gains in risk-adjusted returns compared to traditional BEYR and buy-and-hold benchmark strategies.

A New Measure of Equity and Cash Flow Duration: The Duration‐Based Explanation of the Value Premium Revisited

This article reexamines the duration‐based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross‐sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration‐based explanation of the value premium that explains the value premium with cross‐sectional differences in the firm's cash flow timing, we find that short‐horizon stocks have lower (expected) returns than long‐horizon stocks. This result is consistent with an upward‐sloping equity yield curve.

Achieving affordable housing through energy efficiency strategy

Cooperation between public and private sector has achieved a remarkable widespread, in the Italian context, over the last two decades. Nevertheless, the increasing difficulty in accessing the capital market and the rising cost of funding sources, both noticeable over the past few years, led to a slowdown of Public–Private Partnership (PPP) initiatives. Meanwhile, the community is expressing new needs to be satisfied, such as the conversion of brownfields, the recovery of housing stock dating back to former times, as well as the refurbishment of public offices or schools. Emerging priorities include the supply of affordable dwellings for low to medium income households.This essay aims to examine a case study in which PPP and buildings energy efficiency have been successfully combined, in order to jointly contribute to the achievement of a social housing settlement.Thanks to energy efficiency measures—concerning building envelope insulation, heating system and other installations—the agreed rent results far higher than social rent of protected tenancies, and furthermore above the range of fair rents characterising other regulated tenancies, but mildly lower than market rents. All this allows to achieve an equity yield rate satisfying from the perspective of a venture philanthropy investment.

A New Measure of Equity Duration: The Duration-Based Explanation of the Value Premium Revisited

This paper re-examines the duration-based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross-sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration-based explanation of the value premium that explains the value premium with cross-sectional differences in the firm's cash flow timing, we find that short-horizon stocks have lower (expected) returns than long-horizon stocks. This result is consistent with an upward-sloping equity yield curve.

UK stock market predictability: evidence of time variation

This article examines the nature of time variation within the stock return predictive regression for the United Kingdom. We consider six predictor variables but find significant in-sample evidence of predictive power for only three: the bond–equity yield ratio, the dividend yield and the price–earnings ratio, and out-of-sample evidence for the latter two. Notwithstanding this, we are able to identify substantial evidence of time variation within predictive power for all variables. However, such time variation is only linked to the state of the macroeconomy for the same three variables. Nonetheless, we are able to identify macroeconomic regimes where predictability for each of these three variables is stronger. Specifically, predictive power is stronger for the bond–equity yield ratio when output is rising and stronger for the dividend yield and price–earnings ratio when output is falling. We can use this information to build an improved prediction model by allowing for the variables, including AR terms, t...

Short-term market timing using the bond–equity yield ratio

This paper takes a new look at the market-timing ability of the bond–equity yield ratio (BEYR). We compare the short-term profitability of a naive strategy based on the extreme values of the BEYR to the short-term profitability of a sophisticated strategy relying on regime switches. In contrast to previous studies, we do not document any major international evidence that these dynamic strategies deliver significantly higher risk-adjusted returns than the buy-and-hold portfolios. Moreover, the profitability of these active strategies is not improved when the equity yield, instead of the BEYR, is used as a criterion to time the market.

The Predictive Ability of the Bond-Stock Earnings Yield Differential Model

In this article, the authors survey the bond-stock prediction model for five worldwide equity markets. This model is useful for predicting the time-varying equity risk premium (ERP) and for strategic asset allocation of bond-stock equity mixes. The focus is on the model9s economic and financial implications and its application to the study of stock market strategies and corrections. The model has two versions. The first model, formulated more than 35 years ago by Ziemba and Schwartz, is the difference between the most liquid long bond, usually the 10 or 30-year bond, and the trailing equity yield. The idea is that asset allocation between stocks and bonds is related to their relative yields. When the bond yield is too high, a shift out of stocks into bonds can cause an equity market correction. This model predicted the 1987, 2000, and 2002 corrections in the United States and the 1990 correction in Japan. The second model and equivalent version, the Fed model, uses the ratio, or equivalently the logs, of the two yields, and has its origins in reports and statements from the Federal Reserve System under Alan Greenspan dating from about 1996. The ERP can thus be negative or positive and is, therefore, partially predictable. Despite its predictive ability, the bond-stock model has been criticized as being theoretically unsound because it compares a nominal quantity (the long-bond yield) with a real quantity (the earnings yield on stocks). Theoretical models of fairly priced equity indices can be derived and compared to actual index values to ascertain danger levels. <b>TOPICS:</b>In markets, statistical methods, exchanges/markets/clearinghouses

The information content of the Bond–Equity Yield Ratio: Better than a random walk?

Since the 1990s run up in stock prices and the subsequent crashes, the financial community has taken a dim view of the traditional valuation ratios and has instead turned its attention to a new valuation ratio: the Bond–Equity Yield Ratio (BEYR). In this paper we provide the first comprehensive statistical assessment, both in-sample and out-of-sample, of the fundamental short-term reversion dynamics of the BEYR towards its long-term mean. Using cointegrated VAR models, we show that the BEYR can depart from its long-term relationship for an extended period of time before the reversion process finally brings it back to equilibrium. The out-of-sample forecasting analysis, based on both equally and superior predictive ability tests, shows that the cointegrated VAR model does not perform better than a naïve random walk. As such, we cast doubt on the ability of the BEYR to predict monthly stock returns.