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- Fed_model abstract "The "Fed model" is a theory of equity valuation that has found broad application in the investment community. The model compares the stock market’s earnings yield (E/P) to the yield on long-term government bonds. In its strongest form the Fed model states that bond and stock market are in equilibrium, and fairly valued, when the one year forward looking earnings yield equals the 10-year Treasury note yield The model is often used as a simple tool to measure attractiveness of equity, and to help allocating funds between equity and bonds. When for example the equity earnings yield is above the government bond yield, investors should shift funds from bonds into equity. The Fed model was so named by Ed Yardeni, at Deutsche Morgan Grenfell, based on a statement made in the Humphrey-Hawkins report of July 22, 1997 [1] issued by the Federal Reserve that warned:“…changes in this ratio [P/E of the S&P 500 index] have often been inversely related to changes in the long-term Treasury yields, but this year's stock price gains were not matched by a significant net decline in interest rates. As a result, the yield on ten-year Treasury notes now exceeds the ratio of twelve-month-ahead earnings to prices by the largest amount since 1991, when earnings were depressed by the economic slowdown.”The Fed model was never officially endorsed by the Fed, but former Fed chairman Alan Greenspan seemed to make reference to it in his memoirs: “The decline of real (inflation adjusted) long-term interest rates that has occurred in the last two decades has been associated with rising price-to-earnings ratios for stocks, real estate, and in fact all income-earnings assets.”A bond yield versus equity yield comparison has been used in practice long before the Fed published the graph and Yardeni gave it a name. A variant of this, first the expected AAA bond yield from the Blue Chip survey verusus the forward-earnings yield on the S&P 500, and then later versus the 10-year Treasury was developed by Dirk van Dijk at I/B/E/S in the mid-1980s.".
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- Fed_model wikiPageExternalLink fed-model-theory-of-equity-valuation.html.
- Fed_model wikiPageExternalLink 222632-debunking-the-fed-model.
- Fed_model wikiPageExternalLink reportsection2.htm.
- Fed_model wikiPageExternalLink 112703.asp.
- Fed_model wikiPageExternalLink fed-model.asp.
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- Fed_model caption "Fed model equilibrium comparing S&P 500 earnings yield and 10-year Treasury yield. The descriptive validity of the model is limited before 1982 and after 2007.".
- Fed_model caption "Re-specified Fed model comparing S&P 500 earnings yield with after-tax corporate bond yield . Before 1982 the equilibrium could not be reached due to legal limitations in repurchasing shares .".
- Fed_model footer "Is the Fed model miss-specified? Thirty years of investor money illusion or deliberate company policy ?".
- Fed_model hasPhotoCollection Fed_model.
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- Fed_model image "FED.gif".
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- Fed_model subject Category:Economic_theories.
- Fed_model subject Category:Investment.
- Fed_model type Abstraction100002137.
- Fed_model type Cognition100023271.
- Fed_model type EconomicTheories.
- Fed_model type EconomicTheory105994935.
- Fed_model type Explanation105793000.
- Fed_model type HigherCognitiveProcess105770664.
- Fed_model type Process105701363.
- Fed_model type PsychologicalFeature100023100.
- Fed_model type Theory105989479.
- Fed_model type Thinking105770926.
- Fed_model comment "The "Fed model" is a theory of equity valuation that has found broad application in the investment community. The model compares the stock market’s earnings yield (E/P) to the yield on long-term government bonds.".
- Fed_model label "Fed model".
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- Fed_model depiction Epr797.gif.
- Fed_model isPrimaryTopicOf Fed_model.
