A counterfactual valuation of the stock index as a predictor of crashes / by Tom Roberts.: FB3-5/2017-38E-PDF

“Stock market fundamentals would not seem to meaningfully predict returns over ashorter-term horizon—instead, the author shifts focus to severe downside risk (i.e., crashes). The author uses 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"--Abstract, p. ii.

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Publication information
Department/Agency Bank of Canada.
Title A counterfactual valuation of the stock index as a predictor of crashes / by Tom Roberts.
Series title Bank of Canada staff working paper, 1701-9397 ; 2017-38
Publication type Series - View Master Record
Language [English]
Format Electronic
Electronic document
Note(s) "September 2017."
Includes bibliographical references (32-36).
Includes abstract in French.
Publishing information [Ottawa] : Bank of Canada, 2017.
Author / Contributor Roberts, Tom,1980-
Description ii, 1, 58 p. : col. charts
Catalogue number
  • FB3-5/2017-38E-PDF
Subject terms Stock markets
Financial crisis
Forecasting
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