Advanced

Swedish Stock Returns and the Cyclically Adjusted Price to Earnings Ratio

Nilsson, Joel LU (2017) NEKN05 20171
Department of Economics
Abstract
Evidence from the U.S equity market shows that the cyclically adjusted price to earnings ratio (CAPE) is a strong predictor of future long-horizon stock returns. This paper focuses attention on the Swedish equity market to see whether the CAPE-ratio is applicable to the Swedish market. Furthermore, to see whether a set of secondary explanatory variables may strengthen the predictive power additionally. The assessed variables, besides CAPE, are the price to book ratio, the purchasing managers’ index and long/short interest rates. A quantitative econometric approach is enforced with specific focus on index returns predictability with respect to CAPE. The main results establish that only a short-term relationship is found. The relationship... (More)
Evidence from the U.S equity market shows that the cyclically adjusted price to earnings ratio (CAPE) is a strong predictor of future long-horizon stock returns. This paper focuses attention on the Swedish equity market to see whether the CAPE-ratio is applicable to the Swedish market. Furthermore, to see whether a set of secondary explanatory variables may strengthen the predictive power additionally. The assessed variables, besides CAPE, are the price to book ratio, the purchasing managers’ index and long/short interest rates. A quantitative econometric approach is enforced with specific focus on index returns predictability with respect to CAPE. The main results establish that only a short-term relationship is found. The relationship grows stronger as the return-horizon increases but the practical relevance of this knowledge is partly ruined given the fact that the models are estimated in first differences. The results may only indicate how monthly returns are likely to develop in relation to monthly returns seen today, on a month-to-month basis. Further concluded is the fact that all secondary variables turn out statistically insignificant in the majority of the proposed models. Amongst the assessed variables, CAPE is the best predictor of short-term future return movements. (Less)
Please use this url to cite or link to this publication:
author
Nilsson, Joel LU
supervisor
organization
course
NEKN05 20171
year
type
H1 - Master's Degree (One Year)
subject
keywords
CAPE, Stock Returns, Equity Markets, Market Forecasts
language
English
id
8905660
date added to LUP
2017-05-08 09:20:51
date last changed
2017-05-08 09:20:51
@misc{8905660,
  abstract     = {Evidence from the U.S equity market shows that the cyclically adjusted price to earnings ratio (CAPE) is a strong predictor of future long-horizon stock returns. This paper focuses attention on the Swedish equity market to see whether the CAPE-ratio is applicable to the Swedish market. Furthermore, to see whether a set of secondary explanatory variables may strengthen the predictive power additionally. The assessed variables, besides CAPE, are the price to book ratio, the purchasing managers’ index and long/short interest rates. A quantitative econometric approach is enforced with specific focus on index returns predictability with respect to CAPE. The main results establish that only a short-term relationship is found. The relationship grows stronger as the return-horizon increases but the practical relevance of this knowledge is partly ruined given the fact that the models are estimated in first differences. The results may only indicate how monthly returns are likely to develop in relation to monthly returns seen today, on a month-to-month basis. Further concluded is the fact that all secondary variables turn out statistically insignificant in the majority of the proposed models. Amongst the assessed variables, CAPE is the best predictor of short-term future return movements.},
  author       = {Nilsson, Joel},
  keyword      = {CAPE,Stock Returns,Equity Markets,Market Forecasts},
  language     = {eng},
  note         = {Student Paper},
  title        = {Swedish Stock Returns and the Cyclically Adjusted Price to Earnings Ratio},
  year         = {2017},
}