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

Brooks, C. and Persand, G. (2001) The trading profitability of forecasts of the gilt–equity yield ratio. International Journal of Forecasting, 17 (1). pp. 11-29. ISSN 0169-2070

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To link to this item DOI: 10.1016/S0169-2070(00)00060-1

Abstract/Summary

Research has highlighted the usefulness of the Gilt–Equity Yield Ratio (GEYR) as a predictor of UK stock returns. This paper extends recent studies by endogenising the threshold at which the GEYR switches from being low to being high or vice versa, thus improving the arbitrary nature of the determination of the threshold employed in the extant literature. It is observed that a decision rule for investing in equities or bonds, based on the forecasts from a regime switching model, yields higher average returns with lower variability than a static portfolio containing any combinations of equities and bonds. A closer inspection of the results reveals that the model has power to forecast when investors should steer clear of equities, although the trading profits generated are insufficient to outweigh the associated transaction costs.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:35961
Publisher:Elsevier

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