Equity/bond yield correlation and the FED model: evidence of switching behaviour from the G7 markets

  title={Equity/bond yield correlation and the FED model: evidence of switching behaviour from the G7 markets},
  author={Andreas Humpe and David G. McMillan},
  journal={Journal of Asset Management},
This paper considers how the strength and nature of the relation between the equity and bond yield varies with the level of the real bond yield. We demonstrate that at low levels of the real bond yield, the correlation between the equity and bond yields turns negative. This arises as the lower bond yield implies heightened macroeconomic risk (e.g. deflation and economic stagnation) and causes equity and bond prices to move in opposite directions. The FED model relies on a positive relation for… 
2 Citations



Equity-Bond Returns Correlation and the Bond Yield: Evidence of Switching Behaviour from the G7 Markets

This paper examines the nature of the correlation between (real) equity and bond returns for the G7 markets. From the standpoint of established finance theory, we would expect a positive returns

The 'Fed Model' and the Predictability of Stock Returns

The focus of this article is on the predictive role of the stock-bond yield gap--the difference between the stock market earnings (dividend) yield and the 10-year Treasury bond yield--also known as

Inflation and the Stock Market: Understanding the 'Fed Model'

The so-called Fed model postulates that the dividend or earnings yield on stocks should equal the yield on nominal Treasury bonds, or at least that the two should be highly correlated. In US data

The Gilt-Equity Yield Ratio and the Predictability of UK and US Equity Returns

A number of financial variables have been shown to be effective in explaining the time-series of aggregate equity returns in both the UK and the US. These include, "inter alia", the equity dividend

Does non-linearity help us understand, model and forecast UK stock and bond returns: evidence from the BEYR

The usefulness of non-linear models to provide accurate estimates and forecasts remains an open empirical debate. This paper examines the nature of the estimated relationships and forecasting power

Stocks versus Bonds: Explaining the Equity Risk Premium

From the 19th century through the mid-20th century, the dividend yield (dividends/price) and earnings yield (earnings/price) on stocks generally exceeded the yield on long-term U.S. government bonds,

The trading profitability of forecasts of the gilt–equity yield ratio

Fight the Fed Model

The “Fed model” is a popular yardstick for judging whether the stock market is fairly valued. It compares the stock market's earnings yield to the long-term government bond yield, while more

Why does the correlation between stock and bond returns vary over time?

This article examines the impact of inflation and economic growth expectations and perceived stock market uncertainty on the time-varying correlation between stock and bond returns. The results

Output, the Stock Market, and Interest Rates

This paper develops a simple model of the determination of output, the stock market and the term structure of interest rates. The model is an extension of the IS-LM model and borrows from it the