Yield Gap(Shouyilv quekou)

Also known as yield ratio. This ratio compares the dividend yield on equities with the yield on long-term government bonds. It s used to assess whether equities are under or over-priced compared with government bonds. The dividend yield on equities (expressed as a percentage of the share price) is usually higher than the yield on bonds, reflecting the higher risk of holding equities. When equity prices rise, their dividend yields fall as a percentage of their price, thus reducing the yield ratio. When equity prices fall their yield rises. The theory holds that if earnings yield is higher than bond yield then equities are cheap.