27 Pages Posted: 24 Jan 2012
Date Written: December 3, 2011
This paper predicts the stock market using Tobin’s q, momentum, the Campbell-Shiller CAPE, and a new variant of the CAPE, the CAPER — trend earnings calculated using regressions of log earnings on time. The CAPER is superior to the CAPE. But q emerges as by far the best of the predictors. Two versions of the model are built. The one with momentum predicts a 29% fall in real wealth over the eight years from end 2010. The one without momentum predicts real wealth to increase over all time horizons, but even after fifteen years, only a 32% increase in real wealth.
Keywords: CAPE, CAPER, Tobin’s q, momentum, stock market
Suggested Citation: Suggested Citation
Tower, Edward, Tobin’s Q Versus Cape versus Caper: Predicting Stock Market Returns Using Fundamentals and Momentum (December 3, 2011). Economic Research Initiatives at Duke (ERID) Working Paper. Available at SSRN: https://ssrn.com/abstract=1990449 or http://dx.doi.org/10.2139/ssrn.1990449
By Ivo Welch