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Explaining Changing “Investor Exuberance"

30 Pages Posted: 23 Sep 2024 Last revised: 29 Oct 2024

See all articles by C. N. V. Krishnan

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

Jiemin Yang

Case Western Reserve University

Xiyao Tan

Case Western Reserve University - Weatherhead School of Management

Date Written: October 14, 2024

Abstract

We analyze the determinants of changes in S&P Composite Index Total Return Cyclically Adjusted Price-to-Earnings ratio (TR CAPE), to better understand changing “investor exuberance”. We use three different methods - linear regression using PCA, Lasso, and Ridge regression techniques, as well as ElasticNet method – and a large number of explanatory variables, to explain changing investor exuberance. Across all methods, we find that monthly changes in Michigan sentiment index is significantly associated with monthly changes in TR CAPE. When we crosscheck the results using annual changes (rather than monthly changes), across all methods, annual changes in Michigan sentiment index and changes in core inflation are significantly associated with annual changes in TR CAPE.

Keywords: TR CAPE, Cyclically Adjusted Price-to-Earnings ratio, investor exuberance, PCA, Principal Components Analysis, Lasso regression, Ridge regression, determinants, stock market variables, economy-wide variables, fixed income variables, commodity variables

Suggested Citation

Krishnan, C. N. V. and Yang, Jiemin and Tan, Xiyao,

Explaining Changing “Investor Exuberance"

(October 14, 2024). Available at SSRN: https://ssrn.com/abstract=4938538 or http://dx.doi.org/10.2139/ssrn.4938538

C. N. V. Krishnan (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

11119 Bellflower Rd
PBL 363
Cleveland, OH 44106-7235
United States
216-368-2116 (Phone)

HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

Jiemin Yang

Case Western Reserve University ( email )

Xiyao Tan

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
2165514897 (Phone)

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