Tobin’s Q Versus CAPE Versus CAPER: Predicting Stock Market Returns Using Fundamentals and Momentum

24 Pages Posted: 21 Mar 2011 Last revised: 12 May 2011

See all articles by Edward Tower

Edward Tower

Duke University - Department of Economics; Chulalongkorn University-Economics Department

Multiple version iconThere are 2 versions of this paper

Date Written: March 13, 2011

Abstract

This paper predicts the performance of the stock market using Tobin’s q, momentum, the Campbell-Shiller CAPE, and a new variant of the CAPE, the CAPER, which is trend earnings calculated using regressions of log earnings on time. Generally, the CAPER is superior to the CAPE. But q emerges as by far the most important of the three predictors. Two versions of the model are built. The one with momentum predicts a 18% fall in real wealth over the four years from the end of 2010 from investing in the S&P 500 index. The one without momentum predicts wealth to increase, but even after fourteen years, only a 17% increase in real wealth.

Keywords: CAPE, CAPER, Tobin’s q, momentum, stock market

Suggested Citation

Tower, Edward, Tobin’s Q Versus CAPE Versus CAPER: Predicting Stock Market Returns Using Fundamentals and Momentum (March 13, 2011). Available at SSRN: https://ssrn.com/abstract=1788382 or http://dx.doi.org/10.2139/ssrn.1788382

Edward Tower (Contact Author)

Duke University - Department of Economics ( email )

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Chulalongkorn University-Economics Department

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Thailand

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