TITLE

DOES THE MARKET P/E RATIO REVERT BACK TO "AVERAGE"?

AUTHOR(S)
Weigand, Robert A.; Irons, Robert
PUB. DATE
April 2006
SOURCE
Investment Management & Financial Innovations;2006, Vol. 3 Issue 2, Special section p30
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Compression and expansion of the average market P/E ratio significantly affected U.S. equity returns in both the bear market of 1969-1981 and the bull market of 1982-1999. We compare two models of the market P/E ratio to determine which paradigm is most useful for financial analysts and portfolio strategists trying to anticipate the future direction of the market P/E. We find that the �Fed Model��where investors benchmark the earnings yield on stocks to the 10-year T-note yield�provides a better description of how the market P/E ratio changes over time than the mean-reverting model posited by Campbell and Shiller (1998, 2001). These results suggest that high market P/E ratios and the low expected return on equities that accompany high-P/E environments could persist for an extended period.
ACCESSION #
23039273

 

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