Cyclically Adjusted PE Ratio (CAPE) and Stock Market Characteristics in India

27 Pages Posted: 13 Dec 2022

See all articles by Joshy Jacob

Joshy Jacob

Indian Institute of Management Ahmedabad; Indian Institute of Management Ahmedabad

K P Pradeep

NSE Centre for Behavioral Science in Finance, Economics & Marketing, Indian Institute of Management Ahmedabad

Date Written: September 29, 2022

Abstract

We estimate the Cyclically Adjusted PE ratio (CAPE) for equity indices in the Indian market. We find the average CAPE ratio of the Indian market is lower than that of the US. Judging the market valuation level based on a long-term moving average of CAPE, we find that the CAPE has remained above the average since 2014. Prominent episodes where CAPE exceeds its average include the period before the 2008 Global Financial Crisis and the post-COVID-19 period. We find that a higher CAPE is associated with lower future returns for holding periods varying from one year to ten years, indicating the negative association between expected returns and CAPE. We also find that a higher CAPE is associated with a greater demand for IPOs by investors and more optimistic earnings forecasts by analysts. Net fundraising through equity significantly increases during periods of high CAPE suggesting rational market timing by firms.

Keywords: CAPE, Market Irrationality, Asset Pricing, India

JEL Classification: E3, E7, G1, G4

Suggested Citation

Jacob, Joshy and Pradeep, K P, Cyclically Adjusted PE Ratio (CAPE) and Stock Market Characteristics in India (September 29, 2022). Available at SSRN: https://ssrn.com/abstract=4284806 or http://dx.doi.org/10.2139/ssrn.4284806

Joshy Jacob (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

Indian Institute of Management Ahmedabad ( email )

Vastraour
Ahmedabad, 380015
India
09712977388 (Phone)
380015 (Fax)

K P Pradeep

NSE Centre for Behavioral Science in Finance, Economics & Marketing, Indian Institute of Management Ahmedabad ( email )

IIMA, new campus,
Vastrapur
Ahmedabad, 380015
India

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