Jul
19
Fed Model, from John De Palma
July 19, 2007 |
Here is the Fed model update from the second section of the Monetary Policy Report that Bernanke submitted today:
…The spread between the twelve-month forward earnings-price ratio for the S&P 500 and a real long-run Treasury yield–a rough gauge of the equity risk premium–narrowed a bit and now stands close to the middle of its range of the past few years (…)
Separately, here's the art world's doppelganger of Alan Sokal.
Victor Niederhoffer replies:
A much better effort is the empirical regression of forecasted earnings e/p versus bond yield as the independent variable, and stock price change as dependent, as in my work with Laurel and Tom Downing.
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Notice that they are (correctly IMHO) using the real Treasury yield (probably calculated by comparison to TIPS) rather than the nominal yield on Treasuries to get the risk premium.