Is the Yardstick ratio “a good yardstick†for stock market valuations?

This note empirically examines whether there is a long-run relation between a country's Yardstick ratio––i.e., stock-market capitalization divided by GDP––and total stock-market values. Using U.S. data, we show that this relation does not exist. However, after including the VIX index, our model successfully identifies a stable long-run relation among the three variables. We argue that, possibly, the Yardstick ratio reflects firms' dividend payments, and VIX represents market discount rates. Our novel results indicate that the rule of thumb among practitioners of using the Yardstick ratio as “the best single measure†of stock-market valuations is not well grounded.