http://en.wikipedia.org/wiki/Fed_model
The Fed model equilibrium remains an enigma. On one hand 30 years of data is available that shows how S&P earnings yield and 10-year government bond yield move in tandem. On the other hand there is no theoretical foundation to explain the relationship, and the best explanation academics came up with is that investors collectively suffer from 'money illusion'. A number of questions remain unanswered. Why was the relationship observed in the US and not in most other international markets? Do investors in the US (the world's largest equity market) suffer more from 'illusions' than investors in for example Austria and Finland? Why did the relationship not exist in the US before 1980 (or 1965) and why did the equilibrium break down during the 2008 crisis?
The Fed model equilibrium remains an enigma. On one hand 30 years of data is available that shows how S&P earnings yield and 10-year government bond yield move in tandem. On the other hand there is no theoretical foundation to explain the relationship, and the best explanation academics came up with is that investors collectively suffer from 'money illusion'. A number of questions remain unanswered. Why was the relationship observed in the US and not in most other international markets? Do investors in the US (the world's largest equity market) suffer more from 'illusions' than investors in for example Austria and Finland? Why did the relationship not exist in the US before 1980 (or 1965) and why did the equilibrium break down during the 2008 crisis?
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