THE INFORMATION-CONTENT OF THE GILT-EQUITY YIELD RATIO

In principle the gift-equity yield ratio (GEYR) can be used as a decis ion criterion for choosing between equity and bonds because it is sens itive to mispricing. However, the GEYR is also influenced by other var iables. Consequently, observed movement in the GEYR cannot be confiden tly attributed to mispricing without controlling for the other variabl es which might cause the GEYR to vary. This paper demonstrates that th e GEYR can be used as a signal to switch profitably between equity and bonds provided that the GEYR threshold value indicating a profitable switch is adjusted to incorporate changes in variables such as expecte d inflation and the equity risk premium. Simple empirical experiments are carried out aimed at evaluating how wen the GEYR performs as a tra ding rule.