This study compares the equity allocation model relative to the more popular PE, Shiller CAPE, yield spread, Fed Model, and Buffet's Ratio (Market Cap/GDP) to predict long-term stock market returns. Although all the variables are related to long-run stock returns, only equity allocation and yield spread have root mean square errors consistently lower than a simple moving average. A simple trading rule transferring wealth between equity and 10-year T-bonds demonstrates equity allocation performs best with a 1.3% annual outperformance relative to buy-and-hold from 1990 to 2018. However, the predictive ability of the ratio was not identified until 2013 and since then, the trading strategy has underperformed by 1.5% annually. Thus, despite equity allocation's initial glamour, its long-term predictive ability does not appear to be easily transformed into profitable trading.
| Identifer | oai:union.ndltd.org:ETSU/oai:dc.etsu.edu:etsu-works-10738 |
| Date | 01 January 2020 |
| Creators | Shelley, Garry L., Traian, Anca, Trainor, William J. |
| Publisher | Digital Commons @ East Tennessee State University |
| Source Sets | East Tennessee State University |
| Detected Language | English |
| Type | text |
| Source | ETSU Faculty Works |
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