Quantitative Value Research: Cyclically-adjusted B/M (CA-BM) Factor

/Quantitative Value Research: Cyclically-adjusted B/M (CA-BM) Factor

Quantitative Value Research: Cyclically-adjusted B/M (CA-BM) Factor

By | 2017-08-18T16:58:18+00:00 October 15th, 2014|Research Insights, Value Investing Research|9 Comments

On the Performance of Cyclically Adjusted Valuation Measures

Core Idea:

Gray and Vogel (2012) show that, with respect to stocks, Shiller’s CAPE is not the optimal way to implement a cyclically-adjusted value measure; instead, the paper finds that the Cyclically-adjusted book-to-market (CA-BM) is the best measure to predict returns based on sample from 1973 to 2012.

  • While CA-BM is the marginal top performer over the past 40 years, all cyclically-adjusted value measures have outperformed market benchmarks by large margins.
  • Paper also tests if integrating momentum into cyclically-adjusted measures and monthly rebalancing can enhance returns. Results show that both of these enhancements improve portfolio performance.

Alpha Highlight:

2014-10-03 17_45_42-0Value Reseach Recap.pptx - Microsoft PowerPoint (Product Activation Failed)

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

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About the Author:

Wes Gray
After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  1. sx October 15, 2014 at 11:02 am

    16.6% VS 15.9% : is that significant ? any further stats test ?

    • Jack Vogel
      Jack Vogel, PhD October 15, 2014 at 1:50 pm

      We did not formally test for significant out-performance of one valuation measure versus another. The idea was to document how each of the measures stack up against the others.

      • sx October 15, 2014 at 2:08 pm

        Thanks! I think if there are some robust tests, the results may be more compelling and interesting!

  2. Chris Scott
    Chris Scott October 15, 2014 at 1:57 pm

    How does CA-BM compare with current year EBIT/TEV? Timeframes are little different in the paper vs. the book, but seems like they are similar in results. Since simpler is better, EBIT/TEV would be preferred if they are close.

    Monthly rebalancing always shows better performance gross of transactions/taxes. Net of transactions/taxes – not so much. Have you done any testing with overlapping portfolios formed monthly/quarterly, then held for 12 months? Seems like an overlapping portfolio approach would be much more tax efficient and might pick up some of the time diversification benefit that you get with monthly rebalancing.

    Interesting to see that adding momentum improves returns consistently irregardless of the value metric. A more interesting question is whether adding value to momentum improves momentum returns.

    • Jack Vogel
      Jack Vogel, PhD October 15, 2014 at 3:18 pm

      We did not compare the CA-BM to current year EBIT/TEV, and we have not looked at overlapping portfolios. Both are good suggestions for future research, thanks for the ideas.

  3. Doug01 October 21, 2014 at 10:13 am

    Is cyclically adjusted P/B getting close to Tobin’s Q? When I’ve seen comparisons of Tobin’s Q to CAPE over 10 year periods, Tobin’s Q seems to come out ahead.

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