Clare, A.D., Thomas, S.H. and Wickens, M.R.
Is the gilt-equity yield ratio useful for predicting UK stock returns?
Economic Journal, 104, (423), .
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The ratio of a long government bond yield to the equity market dividend yield, the Gilt-Equity Yield Ratio (GEYR), is commonly used by analysts in the UK as a means of determining the cheapness of equity investment relative to investment in gilts. Analysts use the ratio to predict future movements in equity prices using buy/sell thresholds, implicitly assuming that there is a long-run arbitrage relation between the equity market and the government bond market. A formal econometric analysis confirms that the GEYR is indeed a useful predictor of equity returns in the UK.
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