Does the Fed model travel well?: For short run tactical allocation, yes, but not for the long-haul

Abstract

Equity markets are frequently valued on the basis of the relative yields of stocks and bonds. The most widely known of these comparisons is the Fed model. We extend previous research by examining the performance of this metric across six international markets and also relative to more traditional valuation measures such as earnings and dividend yields. We find the Fed model to be poor for explaining long-run returns but that it has some merit as a short-term tactical asset allocation tool.

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