Quantitative Value Research: Cyclically-adjusted B/M (CA-BM) Factor

Quantitative Value Research: Cyclically-adjusted B/M (CA-BM) Factor

October 15, 2014 Research Insights, Value Investing Research
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(Last Updated On: January 18, 2017)

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:

2014-10-03 17_45_42-0Value Reseach Recap.pptx - Microsoft PowerPoint (Product Activation Failed)
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • sx

    16.6% VS 15.9% : is that significant ? any further stats test ?

  • Jack Vogel, PhD

    We did not formally test for significant out-performance of one valuation measure versus another. The idea was to document how each of the measures stack up against the others.

  • Chris Scott

    How does CA-BM compare with current year EBIT/TEV? Timeframes are little different in the paper vs. the book, but seems like they are similar in results. Since simpler is better, EBIT/TEV would be preferred if they are close.

    Monthly rebalancing always shows better performance gross of transactions/taxes. Net of transactions/taxes – not so much. Have you done any testing with overlapping portfolios formed monthly/quarterly, then held for 12 months? Seems like an overlapping portfolio approach would be much more tax efficient and might pick up some of the time diversification benefit that you get with monthly rebalancing.

    Interesting to see that adding momentum improves returns consistently irregardless of the value metric. A more interesting question is whether adding value to momentum improves momentum returns.

  • sx

    Thanks! I think if there are some robust tests, the results may be more compelling and interesting!

  • Jack Vogel, PhD

    We did not compare the CA-BM to current year EBIT/TEV, and we have not looked at overlapping portfolios. Both are good suggestions for future research, thanks for the ideas.

  • Doug01

    Is cyclically adjusted P/B getting close to Tobin’s Q? When I’ve seen comparisons of Tobin’s Q to CAPE over 10 year periods, Tobin’s Q seems to come out ahead.

  • Jack Vogel, PhD

    What study are you referencing that compares CAPE to Tobin’s Q?

  • Doug01
  • Jack Vogel, PhD

    Thanks for passing along.