A Yield Gap Model for Monthly Stock and Cash Allocation

Summary

The document describes a monthly allocation rule based on a yield gap: the difference between an earnings yield measure for the S&P 500 and the yield on a ten-year Treasury bond. It fits a linear regression using historical yield gaps and stock market returns, then invests fully in the equity proxy when the latest forecast is positive and fully in a short Treasury fund otherwise. The implementation uses daily data feeds and a warm-up period, while checking for missing earnings-yield data.

The code provides implementation details but no backtest results or evidence that the rule predicts returns reliably. Its stated description refers to excess returns and log-transformed yields, while the calculation shown uses a regression of market returns and logs of the yield values; this difference matters when reproducing or evaluating the strategy. The allocation is all-or-nothing, and the excerpt does not describe transaction costs, risk controls, or sensitivity analysis. The method should therefore be treated as a strategy specification to investigate, not as demonstrated performance.

Key ideas

• The strategy uses the gap between equity earnings yield and the ten-year Treasury yield as a predictor.
• A linear regression maps historical yield gaps to stock market returns.
• The portfolio switches fully between an equity proxy and a short Treasury fund based on the forecast sign.
• The code’s return and yield calculations differ from the description’s stated excess-return formulation.
• The document supplies no performance results, cost analysis, or risk controls.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.