When to Buy and When to Sell Equities?
This paper reviews three investment models with a basis in economics which try to answer questions about the relative value of equity markets. Three basic approaches are critically analysed from the perspective of their broad conceptual underpinnings, the available evidence and their data requirements. These three are Professor Shiller’s Cyclically Adjusted Price- Earnings Model (CAPE), Tobin’s q (QR) and the Equitisation Ratio (ER). The paper finds that although there still remains disagreement about the signals on relative market valuation given by the different valuation models, an analysis of the period 1952 to 2010 of their performance in relation to the S&P 500 index in the United States shows that the three measures move together very closely and, apart from a limited number of periods, all of them provide the same signal of an over- or undervalued index. However, all of the models have signalled periods of significant length when the stock market is relatively overvalued or undervalued, without any corrections in the value of the S&P 500. The length of these periods, despite the fundamental warnings given by these methods, can make a considerable difference to the return on any fund focused on short-run performance. This limits their use to investors more interested in the long-term.
Volume (Year): 13 (2012)
Issue (Month): 3 (July)
|Contact details of provider:|| |
When requesting a correction, please mention this item's handle: RePEc:wej:wldecn:525. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ed Jones)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.