اعمال تعویض ها بین سود سهام و بازدهی اوراق قرضه

The relation between bond and equity returns serves as a proxy for estimating the premia investors' demand on their equity portfolio holdings and assessing the substitution effects between the two markets. With this in mind, we examine empirically the co-movements and the underlying information between equities and bonds. Our approach relies on the comparison between bond and dividend yields — a relation better known as the gilt-equity yield ratio–GEYR — by examining the characteristics of the cointegration relation between the bond and equity yields. In this context, this paper's contribution is that it lifts the restrictions of linearity both in the long-run cointegration relations and in the underlying short-run relations presented in the VECM. Specifically, we apply the regime-switching framework of Gregory and Hansen (Gregory, A. W. & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of Econometrics 70, 99–126) for the long-run equilibriums and the Markov Switching VECM, established by Krolzig (Krolzig, H.M., 1997. Markov switching vector autoregressions. Modelling statistical inference and application to business cycle analysis. Springer, Verlag) for the short run ones. Our aim is to examine the allocation of capital among the UK bond (or else, gilt) and stock markets for the period of 01-1987 to 01-2007, in a fashion that better reflects the structural breaks and regime shifts of the underlying market conditions. Our findings confirm the substitution effects among stocks and bonds in the long run and highlight the importance of market conditions for the allocation of capital among stocks and bonds.

The aim of this paper is to investigate the relationships between stock index prices, dividends and interest rates. Specifically, empirical and theoretical literature on stock price valuation always incorporates, directly or indirectly, a substitution effect among stocks and bonds, namely the assets compensating for different states of the market. The examination of the relationship between stock prices, dividends and government bond yields has been the focus of many research studies over the last two decades. An extensive literature exists studying the relation between the bond and stock markets. Lim, Gallo, and Swanson (2000) provide evidence for strong interrelations among the international bond and stock market. Cowan and Joutz (2004) find that equity returns reflect macroeconomic variables, well known to affect bond markets as well, such as industrial production and unanticipated inflation movements. Furthermore, Jones, Lin, and Masih (2004) find cointegration relations among the UK's short rates, gilts and equities. However, the most prominent model for this investigation is the so-called gilt-equity yield ratio (GEYR)1, which, according to Mills (1991), has been a very efficient tool for market practitioners in the UK in order to forecast future movement in prices. Clare, Thomas, and Wickens (1994) use GEYR as a guide for investment decisions and evaluate three separate trading rules over the period 1990–1993. The authors conclude that the GEYR is a useful predictor of equity returns. However, Levin and Right (1998), extending the work of Clare et al. (1994), find that the GEYR alone cannot possibly provide a profitable asset allocation decision criterion. Finally, Harris and Sanchez-Valle (2000) and Brooks and Persand (2001) suggest that the gilt-equity yield ratio has substantial explanatory power for UK equity returns. Giot and Petitjean (2007) apply the bond–equity yield ratio in order to investigate the long-term relationship between stock index prices, dividends and bond yields. By using an extensive sample of seven countries (Germany, Belgium, France, Japan, Netherlands, UK and the USA) for the time period 1973–2004, they investigate their assumptions by first using cointegration analysis and then by adopting Brooks and Persand's regime switching approach whereby they add another trading rule, thus providing evidence that a long-term cointegrating relationship exists between stock index prices, stock index earnings and government bond yields. Over the last few years, special attention has been allotted to a valuation method similar to the GEYR, the so-called Fed-model. The Fed-model assesses stock markets by comparing stock and bond yields. According to this model, the stock market's earnings yield should be compared to a 10-year government bond yield. According to the Fed-model, if the earnings yield exceeds the bond yield then stocks are cheap. In contrast, when a 10-year government bond yield exceeds an earnings yield, stocks are deemed expensive. The main difference between the two models is that in the GEYR framework researchers use dividends while in the Fed-model, they use anticipated earnings. The organisation of this paper is as follows: 2 and 3 present the theoretical and methodological frameworks respectively, while in Section 4 we present the empirical results. Finally, Section 5 concludes the paper.

This study highlights the diverse nature of the gilt-equity yield ratio, allowing for changing market conditions to be reflected by a regime switching framework. Specifically, our findings indicate the existence of shifts between bond and dividend yields, which, in the case where they are taken into account with the proper econometric framework, optimize the information provided by the theoretically imposed relation. Thus, we have illustrated that incorporating the changing nature of market conditions is essential for the robust empirical examination of theoretical relations in financial markets. This perception is especially valid for financial markets as sharp declines and high volatility periods contribute to the blurring of the results of standard econometric analysis. We have illustrated that the robust reflection of the relation between the bond and dividend yields can be achieved only under a non-linear methodological approach. The regime switching techniques used have provided the efficient context for this investigation, as the initial results with typical cointegration tests are indicated to be significantly different when structural breaks, indicated by the Gregory and Hansen (1996) tests, are taken into account. Overall, the results of our analysis support the theoretical foundations of the GEYR that there exist significant interactions between the bond and equity markets and allow for the reflection of the shifts in the dividend policies of the underlying equities. However, the strict substitution effects between equities and bonds, as modeled by the GEYR, gain support conditional on the overall market trends. Specifically, evidence is provided that the dividend and bond yield co-move in close fashion, although exogenous factors, such as the dividend policy decisions, can alter the composition of the long run equilibrium relation. Overall, our regime switching formulation of the GEYR and the short run interactions indicate that the close relation between the dividend and the bond yields was the case for most of the 90's while from the beginning of the 00's the dividend yield has been diverging from the underlying fundamental relation as a result of exogenous factors. Our work raises several interesting issues. Specifically, the reported results indicate that shifts in the formulation of dividend yields should be taken into account to properly estimate the investigation queries. The first shift is indicated to provide strengthened interactions, confirming the theoretical hypothesis of the BEYR, while the second evidently leads to a divergence from the strict (1−1)` relation, related to the shifts in dividend policies. The lift of the imposed (in standard approximations) linearity of the underlying relations poses the question of whether to further investigate the information content of the BEYR, in light of its shifting patterns. All in all, we find that the UK dividend yields closely interact with the benchmark long-term yields, while the structure of the long run relation is subject to shifts in dividend policies. A natural way forward is to investigate the information content of the GEYR, which is expected to differ between periods of enhanced, as compared to periods of more lenient interactions between stock and bond markets. Specifically, an interesting field for future research would be to examine the information provided by the regime switching GEYR, concerning financial markets' conditions, in a forward looking perspective. Furthermore, the examination of alternative market-sourced financial stability indicators, in a regime switching content, would provide an interesting comparison.