My Finance

Continuing my research program, I regress S&P returns (nominal/real, price/total) upon the new valuation measure, nicknamed the bubble, and upon the three bond spreads: BAA-AAA, AAA-Long, Long-Short. We normalize this regression by volatility in the usual way. We consider averaging windows of 5 and 10 years.

Results: Each time, innovations are IID Gaussian. The ACF plots exhibit the same strange autocorrelation at lag 4. But overall, they are consistent with white noise. Each of three spreads is insignificant, judging by the Student test. But the bubble is significant for nominal (but not real!) returns, both price and total.

See the GitHub repository spreads-bubble-returns.