By |Published On: October 15th, 2014|Categories: Research Insights, Value Investing Research|

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:

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About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia 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 firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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