quick question:
The Fed Model does not account for inflation, i.e. compares real (equity market yield) with nominal (bond yield).
Does the Yardeni Model (E/P = Yb - d x LTEG) account for Inflation?
Many thanks.
I dont think you’ll see a question on this, but:
Technically, the discount factor, Single A rated bonds, is determined by: Expected Inflation + Real Fisk Free+ Default risk preimium + possibly a liquidity premium and term termium…
So yes, inflation is in the discount rate
FYI.
In schweser workshop exam, P57, Q3. The following statement is Not False.
“Both fed and Yardeni models are based on comparisons between real and nominal values.”
Yardini model considers long term earnings growth LTEG, so it incorporates long term expected inflation. And LTEG is expected to be constant. So it does not answer the actual inflation thats fluctuating. I think it does address expected inflation but not actual inflation.
In Yardeni model, Fair Earings Yield = yb - d*LTEG.
Both rate A bond yield(yb) in Yardeni Model and Treasury bond yield in Fed Model are in nominal term. No?
I am with Tuluku, i would think both capture expected inflation. I think you are confusing the whole ‘real variable to nominal variable’ thing with “not accounting for inflation”
Have you seen a specific problem that literally says either model doesn’t account for inflation? The nominal variable is the bond yield, the real variable is the earnings yield.