On the predictive power of CAPE or Shiller’s PE ratio: the case of the Greek stock market

Dimitris Kenourgios, Spyros Papathanasiou and Anastasia Christina Bampili ()
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Anastasia Christina Bampili: Hellenic Open University

Operational Research, 2022, vol. 22, issue 4, No 19, 3747-3766

Abstract: Abstract This paper examines the capability of the Cyclically Adjusted Price to Earnings (CAPE) or Shiller’s P/E ratio, along with other relative valuation ratios such as the P/E and the P/BV, to predict future returns of the FTSE/ASE Large Cap Index, starting from the development of the index (1997) to December 2018. We have herein used several regression models in order to examine the relationship between the above ratios and the future returns of 1, 3, 5 and 10 years. We show that, while P/E and P/BV ratios are not correlated to future returns, the CAPE ratio and its variation CAPE 5, which uses real 5 year earnings, are efficient estimators of future returns. Our results imply the informational inefficiency of the Greek Stock Market.

Keywords: Returns forecasting; FTSE/ASE large cap index; CAPE ratio; Efficient market hypothesis (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s12351-021-00658-x

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