Market Timing Rule with Bond to Equity Yield Ratio

    This market-timing strategy uses the bond-equity yield ratio as an indicator to predict future stock market return. In this strategy, stocks are supposed to be sold when the indicator rises above the predefinded threshold value, and vice versa. It also has “delay day” and “waiting day” settings.

    The so-called bond-equity yield ratio (beyr), which is defined as the ratio of the bond yield to the yield in the stock market, has become a popular indicator for future stock market movements. It is assumed that beyr possesses a long-term level which reflects the long-run arbitrage relation between the government bond market and the stock market. If the beyr becomes high relative to its long-term level, equity yields are considered to be low compared to yields on bonds. Stock prices are therefore expected to fall in order to reestablish the long-run equilibrium. In contrast, a low beyr indicates that equities are cheap compared to bonds and that equity yields are expected to decrease in order to restore the long-term relationship. Besides, beyr is also called gilt-equity yield ratio.

    In this Strategy, for the bond-equity yield ratio, falling below a certain threshold is considered to be a switch signal from holding cash to investing in S&P 500 Index, and vice versa. If the same switch signal persists for “delay days”, we switch the trading position. And in the succeeding “waiting days” we keep the position ignoring the new switch signals. The signals are examined every trading day.

    Threshold can set to be certain fix values or SMA (Simple moving average) of certain days. The BuySecurity can only be set as ^GSPC or VFINX. And the Portfolio StartDate should not be set to the date earlier than 01/02/1990 due to lack of data.

Parameters used in the created portfolio:

Indicator: Bond-equity yield ratio

TresholdValue: 0.7, 0.9, SMA 30days (default), SMA 120days

WaitingDay´╝Ü1 day, 5 days (default)

DelayDay: 1 day, 5 days (default)

BuySecurity: ^GSPC (default), VFINX

Bond yield: ^TNX (default, 10-year T-Bond rate), ^FVX (5-year T-Bond rate), ^TYX(30-year T-Bond rate).   


Similar Strategies in ValiFi:

See Also


Relative Working Papers: 

Relative books:


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