Stock Market Crashes in 2007-2009: Were We Able to Predict Them?

Sebastien Lleo, William T. Ziemba
2011 Social Science Research Network  
We investigate the stock market crashes in China, Iceland, and the US in the 2007-2009 period. The bond stock earnings yield difference model is used as a prediction tool. Historically, when the measure is too high, meaning that long bond interest rates are too high relative to the trailing earnings over price ratio, then there usually is a crash of 10% or more within four to twelve months. The model did in fact predict all three crashes. Iceland had a drop of fully 95%, China fell by two thirds and the US by 57%. JEL: G14, G15, G12, G10
doi:10.2139/ssrn.1884081 fatcat:pmylpbjqnrh6dew6ejlobxp7xy