top of page

Main Research

The beginning...

The Shiller PE is well known today by institutional investors, but
its origin goes back almost 80 years

A brief history...

The Cyclically Adjusted Price Earnings ratio (CAPE), also known as the P/E 10 ratio or the Shiller index,​ was popularized by Professor Robert J. Shiller an Economist from Yale University, when he published his book: "Irrational Exuberance".


But it was ínvented in 1934

He was inspired by the book Security Analysis in which Benjamin Graham and David Dodd suggested to use an earnings average to determine a fair valuation for individual stocks: "not less than five years, preferably seven or ten years." For this reason some analysts still refer to the index as the "Graham & Dodd PE ratio".


Robert Shiller applied it to indexes and came up with proof
Robert Shiller conducted research in 1996 on valuation ratios for equity indexes and analyzed the S&P 500 Index from 1871 to the current day to determine if a ratio similar in nature to the common P/E ratio but with the added twist of 10 years of Earnings Per Share (EPS) data would be effective and more accurate in determining if the market as a whole was overvalued or undervalued.


What he found was that in general a Shiller P/E Ratio of roughly 18-20 meant that the market was properly priced as measured against earnings averaged over the previous ten years. Dr. Shiller's data set can be found here.

So Shiller's PE can be a very useful tool for long term asset allocators.

But.. Siegel's critique

Jeremy Siegel however has critized the work of Robert Shiller in August 2013 during a CNBC interview. Shiller uses the S&P earnings, which are - according to Siegel - biased. Siegel thinks you should use earnings of all companies in the US, the NIPA. But NIPA has some important flaws as well. 

Check out an excellent summary of the two viewpoints on the website of Advisor Perspectives.

In 2011, some suggestions were made.

But in 2011 this article [TO BE ADDED], came up with an explanation of why the CAPE has been higher.

Vanguard ranks Shiller PE as best predictor

A much quoted article, from 2014, done by Vanguard shows that the CAPE performs better than other valuation measures. 

Finally some clarity? Shiller driven by inflation in interest rates.

In 2018, a paper from Rob Arnott is published. Research Affiliates has found a statistical explanation for the elevation since 1995: interest rates and inflation. It is both the level and volatility of those factors that can explain the deviation. And it makes sense: if economic growth is more stable and inflation is reliable and low, an investor runs less risk, so the valuation goes up.

Check it out here: King of the Mountain: The Shiller P/E and Macroeconomic Conditions | Research Affiliates


Important research

Before reading further: sometimes you find out that someone else has done something similar as we are trying here. Check out this excellent summary from Mebane Faber or Barclays: 

  1. Everything You Need To Know About the CAPE Ratio - Meb Faber Research - Stock Market and Investing Blog

  2. About the CAPE® Ratio | Barclays Indices (

We will continue with our own overview, so see if we can contribute to the work of Meb Faber. Barclays also ha

Forecasting stock returns: What signals matter, and what do they say now?

A Vanguard paper from 2014 studies several valuation indicators and concludes that the PE ratio is an effective valuation indicator on long term horizons.


"We confirm that valuation metrics such as price/earnings ratios, or P/Es, have had an inverse or mean-reverting relationship with future stock market returns, although it has only been meaningful at long horizons and, even then, P/E ratios have “explained” only about 40% of the time variation in net-of-inflation returns. Our results are similar whether or not trailing earnings are smoothed or cyclically adjusted (as is done in Robert Shiller’s popular P/E10 ratio)."

bottom of page