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

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

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

By | 2017-01-18T13:26:15+00:00 October 15th, 2014|Research Insights, Value Investing Research|18 Comments
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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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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. 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.