Does the bond-stock earning yield differential model predict equity market corrections better than high P/E models?

In this paper, we extend the literature on crash prediction models in three main respects. First, we relate explicitly crash prediction measures and asset pricing models. Second, we present a simple, effective statistical significance test for crash prediction models. Finally, we propose a definition and a measure of robustness for crash prediction models. We apply the statistical test and measure the robustness of selected model specifications of the Price-Earnings (P/E) ratio and Bond Stock Earning Yield Differential (BSEYD) measures. This analysis suggests that the BSEYD, the logarithmic BSEYD model, and to a lesser extent the P/E ratio, are statistically significant robust predictors of equity market crashes.