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Investing Research Articles

29 Research Articles

A Fed Model Defense

…the Fed model and the long-term P/E mean reversion model are complementary perspectives on return prediction, with the former reasonably useful for forecasting up to three years into the future and the latter applicable over longer horizons.

Testing the Fed Model

The guiding belief of the Fed Model of stock market valuation is that investors use a Treasury note (T-note) yield as a benchmark for the expected (forward) earnings yield of the stock market. When the gap between the forward earnings yield and the T-note yield is positive (negative), stocks are relatively attractive (unattractive), and investors… Keep Reading

Fed Model Improvement?

Is there a better way than the Fed model to measure relative attractiveness of equities and bonds. In his October 2020 paper entitled “Towards a Better Fed Model”, Raymond Micaletti examines seven Fed Model alternatives, each comparing a 10-year forward annualized estimate of equity returns to the yield of 10-year constant maturity U.S. Treasury notes… Keep Reading

Fed Model or P/E Model for Predicting Stock Market Corrections?

Can investors rely on overvaluation signals from the market price-earnings ratio (P/E) and the Fed Model to predict major stock market corrections? Which model works better? In their July 2013 paper entitled “Does the Bond-Stock Earning Yield Differential Model Predict Equity Market Corrections Better Than High P/E Models?”, Sebastien Lleo and William Ziemba test the power of… Keep Reading

Last Nail in the Coffin of the Fed Model?

…practitioners who use the Fed Model are simpletons. The model is theoretically implausible and empirically challenged.

Fed Model Versus P/E Model

…the Fed Model better describes the behavior of the market P/E over the past forty years than does a mean-reverting model.

Fed Model: Predictive or Not?

…the Fed Model is inferior to fundamental valuation in predicting long-term stock returns, but it may have some tactical value.

Fed Model Respecified?

The Fed Model relates the aggregate earnings yield (E/P) of the stock market to Treasury bond or bill yields under the assumption that investors view equities and government bonds as competing ways to achieve yield. Might supply (company management), rather than demand (investors), more precisely drive the relationship between E/P and interest rates? In the… Keep Reading

50-Year Fed Model Meme?

…the Fed Model has worked pretty well starting about 1960, with interest rates since playing a key role in stock valuation.

Inflation as Fed Model Intermediator

…the high correlation between equity yield and bond yield derives rationally from the tendency for inflation to be elevated during recessions, such that both equity and bond premiums are relatively high during recessions.