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.
- Sprache
-
Englisch
- Erschienen in
-
Series: Bank of Canada Staff Working Paper ; No. 2017-38
- Klassifikation
-
Wirtschaft
Financial Crises
Asset Pricing; Trading Volume; Bond Interest Rates
Financial Forecasting and Simulation
General Financial Markets: Other
- Thema
-
Asset pricing
Financial stability
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Roberts, Tom
- Ereignis
-
Veröffentlichung
- (wer)
-
Bank of Canada
- (wo)
-
Ottawa
- (wann)
-
2017
- DOI
-
doi:10.34989/swp-2017-38
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:45 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Roberts, Tom
- Bank of Canada
Entstanden
- 2017
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