Volatility Measures for the Dow Jones Indusrtial Average, 1946-96 Daily volatility (percent) 2.5 Panel A: Standard Deviation and Median Absolute Percentage Change 2.0
October 1996, Laster & Cole
0.5 Median absolute percentage change 0 1946
Source: Current Issues In Economics & Finance – Volume 2 Number 11, October 1996, Laster & Cole
“IF THE US IS INDEED UNDERGOING A SECULAR CHANGE IN ASSET ALLOCATION STRATEGIES, THIS WILL LIKELY LEAD TO A LASTING CHANGE IN ASSET PRICES.” Thus, while many think
amounts of their portfolios to equities,
market will follow suit as investors
of a 60/40 equity to bond portfolio as
they pushed equity dividend yields to
have, for the 25th week in a row,
“balanced”, it is indeed exposed to
levels below that of both the 10 year
withdrawn funds from equity mutual
a disproportionate amount of equity
Treasury and A A A corporate bonds.
funds on a net basis, according to ICI.
risk. Therefore, a secular increase in
One can interpret this as a richening
If the US is indeed undergoing
volatility would only further lead to
of equities in relationship to bonds.
a secular change in asset allocation
even greater portfolio f luctuations due
Academics have found that dividend
strategies, this will likely lead to
to equity allocation and keeping the
yields are positively correlated with
a lasting change in asset prices.
equity premium constant, to a reduced
decrease in demand for equities, while
equity bias in portfolios.
dividend yields could imply lower future
stock returns. Buckland defines this
result in a decrease in prices.
and therefore, low
phenomenon as the “reverse yield gap”
implications for such a scenario, were
and as an indicator of the prevalence
it to come true, would span all sectors
start of the cult of equities in the
of the “cult of equities.”
of American life, from pension fund
1950s, the spreads between US equity
Buckland observes that the reverse
dividend yields and both the Moody’s
yield gap has disappeared, meaning
to the way individuals manage their
US Corp Bond Yield (A A A) and US 10
that investors’ irrational belief in the
retirement account. It seems that after
Year Treasury yield were both positive.
equity markets is already decreasing.
claiming major investment banks as
This meant that equities yielded more
In the US however, the SP 500 yielded
victims, the Great Recession rode on
than both corporate A A A rated bonds
1.85% while the US 10 Year Treasury
and buried the cult of equities. iBR
and 10 Year US government bond
bond yielded 2.66% (at time of print).
Nonetheless, it is likely that the US
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I N T E R N AT I O N A L B U S I N E S S R E V I E W
11/27/2010 3:13:02 PM
Fall edition of the IBR magazine at the Wharton School.