14 August 2014

Price-Earnings Ratios and Return Predictability

Oliver Bunn and Robert Shiller construct Cyclically Adjusted Price Earnings (CAPE) ratios for the aggregate U.S. stock market, and for the Industrials, Utilities, and Railroad sectors, from the 1870s through 2013. They find that the CAPE ratio has predictive power for future stock market returns, both for the overall market and for each of the three sectors.