The bond-stock earnings yield model for stock market crash prediction: the basic idea and early applications

Abstract

We discuss the bond-stock earnings yield differential model (BSEYD) starting from when Ziemba first used it in Japan in 1988 through 2016 in various countries. The model has called many but not all crashes. Those have high interest rates in the most liquid long-term bonds relative to the trailing earnings-to-price ratio. In general, when the model is in the danger zone, almost always there will be a crash. The model called the 2000 and 2002 US crashes. A long horizon term study for the US, Canada, Japan, Germany, and the UK shows that being in the stock market when the bond-stock signal is not in the danger zone and in cash when it is in the danger zone provides a final wealth about double buy and hold for in these five countries.