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A Time-Series Analysis and Forecast of Cape

Expanding stock market valuation multiples add to expected returns, and contracting multiples subtract from them. But how to forecast valuation measures such as the cyclically adjusted price-to-earnings (CAPE) ratio? Using Robert Shiller’s CAPE, the author first shows that forecasts based on mean reversion are almost certainly wrongCAPE appears to be nonstationary, indicating no tendency toward mean reversion. The author then provides forecasts of CAPE using time-series analysisan approach that requires no theory and accommodates a range of views about factors that influence valuation. The author suggests that practitioners use these time-series forecasts to help inform capital market assumptions.

Author - Marc Fandetti
Journal - Journal of Portfolio Management

Source - https://jpm.pm-research.com/content/47/8/138