Published: Fallacies of the Fed Model

by Adam Butler, http://gestaltu.com

The Journal of the Society of Actuaries held a contest for articles on investment myths, and we are honored to have had our article on ‘Fallacies of the Fed Model’ chosen for publication in this prestigious journal. We want to thank our co-authors, David Cantor and Kunal Rajani of PriceWaterhouseCoopers, for proposing this collaboration, and for their critical insights and analytical contributions.

Our article addressed fallacies related to the Fed Model of equity market valuation. Stated simply, the Fed model implies that investors arbitrage the earnings yield on stocks against the Treasury yield, such that when the earnings yield is higher than the Treasury yield stocks are more attractive, and vice versa. Our article invokes Asness, Hussman and Estrada, and offers new evidence to demonstrate the model is – theoretically and empirically – nonsense.

We’ve embedded the article below, but readers will find a wealth of other excellent analysis in the full Journal here.

SOA Fallacy Fed Model – GestaltU

The post Published: Fallacies of the Fed Model appeared first on GestaltU.

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