On the Performance of Cyclically Adjusted Valuation Measures

Abstract

We confirm the effectiveness of using cyclically-adjusted valuation metrics to identify high performing stocks. The Shiller P/E, or cyclically-adjusted price-to-earnings (CAPE) ratio, is not the optimal way to implement a cyclically-adjusted value measure. At the margin, the cyclically-adjusted book-to-market (CA-BM) is a better measure to predict returns. We find that more frequent rebalancing and momentum can enhance strategies based on cyclically-adjusted valuation metrics.

Keywords: CAPE, Shiller P/E, long-term valuation metrics, value investing, market efficiency, abnormal returns

JEL Classification: G10, G12, G14