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Article

Es-cape-ing from Overvalued Sectors: Sector
Selection Based on the Cyclically Adjusted
Price-Earnings (CAPE) Ratio

Oliver Bunn, Arne Staal, Ji Zhuang, Anthony Lazanas, Cenk Ural and Robert Shiller
The Journal of Portfolio Management Fall 2014, 41 (1) 16-33; DOI: https://doi.org/10.3905/jpm.2014.41.1.016
Oliver Bunn
works in the global research department of Barclays Bank in London, U.K.
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  • For correspondence: oliver.bunn@barclays.com
Arne Staal
works in the global research department of Barclays Bank in London, U.K.
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  • For correspondence: arne.staal@barclays.com
Ji Zhuang
works in the global research department of Barclays Bank in London, U.K.
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  • For correspondence: ji.zhuang@barclays.com
Anthony Lazanas
works in the global research department of Barclays Bank in New York, NY.
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  • For correspondence: anthony.lazanas@barclays.com
Cenk Ural
works in the global research department of Barclays Bank in New York, NY.
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  • For correspondence: cenk.ural@barclays.com
Robert Shiller
is the Sterling Professor of Economics at Yale University in New Haven, CT.
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  • For correspondence: robert.shiller@yale.edu
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Abstract

This article explores the effectiveness of the cyclically adjusted price-earnings (CAPE) ratio to detect over- or undervaluation of sectors within the U.S. economy. The authors modify the original notion of the ratio from several empirical studies by John Campbell and Robert Shiller, not only to ensure uniform corporate payout policies, but also to allow comparisons across the sectors’ potentially differing accounting standards and varying growth expectations. Considering sector-level CAPE information back to the early 1980s, the authors translate the CAPE-based valuation signals into a sector rotation strategy, whose long-term value nature is complemented by a supplemental momentum adjustment, in order to eliminate value traps. The performance enhancement associated with the CAPE-based sector rotation extends to European sectors as an out-of-sample test.

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The Journal of Portfolio Management: 41 (1)
The Journal of Portfolio Management
Vol. 41, Issue 1
Fall 2014
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Es-cape-ing from Overvalued Sectors: Sector
Selection Based on the Cyclically Adjusted
Price-Earnings (CAPE) Ratio
Oliver Bunn, Arne Staal, Ji Zhuang, Anthony Lazanas, Cenk Ural, Robert Shiller
The Journal of Portfolio Management Oct 2014, 41 (1) 16-33; DOI: 10.3905/jpm.2014.41.1.016

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Es-cape-ing from Overvalued Sectors: Sector
Selection Based on the Cyclically Adjusted
Price-Earnings (CAPE) Ratio
Oliver Bunn, Arne Staal, Ji Zhuang, Anthony Lazanas, Cenk Ural, Robert Shiller
The Journal of Portfolio Management Oct 2014, 41 (1) 16-33; DOI: 10.3905/jpm.2014.41.1.016
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  • Article
    • Abstract
    • CONSTRUCTION OF A LONG-TERM VALUATION RATIO
    • SECTOR ROTATION BASED ON RELATIVE CAPE
    • PERFORMANCE ATTRIBUTION
    • EXTENSION TO SECTORS OF THE STOCK MARKET(S) IN EUROPE
    • APPENDIX
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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