Quantitative Value Research: Cyclically-adjusted B/M (CA-BM) Factor
On the Performance of Cyclically Adjusted Valuation Measures
- Gray and Vogel
- A version of the paper can be found here.
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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.
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Definitions of common statistics used in our analysis are available here (towards the bottom)