Arbeitspapier
A counterfactual valuation of the stock index as a predictor of crashes
Stock market fundamentals would not seem to meaningfully predict returns over a shorter-term horizon - instead, I shift focus to severe downside risk (i.e., crashes). I use the cointegrating relationship between the log S&P Composite Index and log earnings over 1871 to 2015, combined with smoothed earnings, to first construct a counterfactual valuation benchmark. The price-versus-benchmark residual shows an improved, and economically meaningful, logit estimation of the likelihood of a crash over alternatives such as the dividend yield and price momentum. Rolling out-of-sample estimates highlight the challenges in this task. Nevertheless, the overall results support the common popular belief that a higher stock market valuation in relation to fundamentals entails a higher risk of a crash.
- Language
-
Englisch
- Bibliographic citation
-
Series: Bank of Canada Staff Working Paper ; No. 2017-38
- Classification
-
Wirtschaft
Financial Crises
Asset Pricing; Trading Volume; Bond Interest Rates
Financial Forecasting and Simulation
General Financial Markets: Other
- Subject
-
Asset pricing
Financial stability
- Event
-
Geistige Schöpfung
- (who)
-
Roberts, Tom
- Event
-
Veröffentlichung
- (who)
-
Bank of Canada
- (where)
-
Ottawa
- (when)
-
2017
- DOI
-
doi:10.34989/swp-2017-38
- Handle
- Last update
-
10.03.2025, 11:45 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Roberts, Tom
- Bank of Canada
Time of origin
- 2017
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