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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| 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 |
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| Subject terms | Stock markets Financial crisis Forecasting |
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