A new stock market valuation measure with application to retriement planning

Sarantsev Andrey ()
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Sarantsev Andrey: Department of Mathematics and Statistics, 6851 University of Nevada , Reno, NV 89557, USA

Statistics & Risk Modeling, 2025, vol. 42, issue 1-2, 1-18

Abstract: We generalize the classic Shiller cyclically adjusted price-earnings ratio (CAPE) used for prediction of future total returns of the stock market. We treat earnings growth as exogenous. The difference between log wealth and log earnings is modeled as an autoregression of order 1 with linear trend 4.6 and Gaussian innovations. Detrending gives us a new valuation measure. Our results disprove the Efficient Market Hypothesis. Therefore, long-run total returns equal long-run earnings growth plus 4.6 Ẇe apply results to retirement planning. A withdrawal process governs how a retired capital owner withdraws a certain fraction of wealth annually. We study the long-term behavior of such processes.

Keywords: Autoregression; total returns; earnings growth; ergodic process (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/strm-2022-0009

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