CAPE with tapered weights

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CAPE with tapered weights

Post by Beliavsky » Thu Jan 10, 2019 2:30 pm

An analyst note

Is this popular measure of stock market value giving a misleading “sell” signal?
Here's why scare stories about the current CAPE being a predictor of doom may prove to be wide of the mark.
10 JANUARY 2019
by Duncan Lamont

says that the 10-year CAPE for the U.S. stock market will fall substantially once the low earnings of 2009 roll off. To reduce this echo effect, one could computed a weighted average earnings with declining weights, for example

avg(t) = (3*x(t) + 2*x(t-1) + x(t-2))/6

for a 3-term average. Then the impact of prior-year earnings would decline gradually. I wonder if anyone who has backtested CAPE has looked at this. A weighted CAPE gives more weight to recent earnings, and to compensate for this one could extend the lookback period from 10 to say 15 years.

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