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Abstract
Does Campbell and Shiller’s CAPE accurately predict equity returns? Authors Thomas Philips of BNP Paribas says that “[CAPE] has very sound theoretical underpinnings,” but “its usage ranges from very thoughtful to quite careless.” Not do he or co-author Cenk Ural think any recent enhancements have “substantially improved on the ability of the basic CAPE methodology to describe and forecast returns.”
In this conversation with Institutional Investor Journals, they explain how their proposed modifications, such as using accounting-flow variables such as cash flow and revenues in place of earnings and cyclically adjusted earnings can effectively supplement, and even improve, CAPE‘s market return forecasts.
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