I was playing around with the data over on Shiller’s website the other day and thought I would post a few of the charts. Nothing mind-blowing here, it just annoyed me how you always saw the results posted in 5 pt buckets (which are arbitrary) rather than in quartiles or deciles. Below are the buckets, followed by the deciled, followed by a scatterplot. It seems like there are three groupings, great returns up to about 13, then decent returns up to about 20, then crappy returns over 20.
where are the stocks which went bust?
and how do you account for stocks which get taken over during the ten year period?
Great work as always! How about doing the same analysis for a 5 year average P/E? Leuthold uses something like that rather than the 10 year he used to use. I'm not sure why he switched, maybe 5 year has better predictive power?
He's building on Shiller's work which uses PE10. Stocks that went bust are tracked however that is done in the S&P 500, or whatever Shiller's data set uses for periods before the S&P existed.
The number of points in the scatter, and the cluster at a PE greater than 35, suggest to me that the unit of observation is months, or perhaps quarters. This creates an auto-correlation problem in your regression. What does this scatter, and equation, look like if your unit of observation is calendar year? you will still have an auto-correlation problem, but it only invalidates the statistical significance test. You can probably control for the auto-correlation with an auto-regression multivariate model.
The number of points in the scatter, and the cluster at a PE greater than 35, suggest to me that the unit of observation is months, or perhaps quarters. This creates an auto-correlation problem in your regression. What does this scatter, and equation, look like if your unit of observation is calendar year? you will still have an auto-correlation problem, but it only invalidates the statistical significance test. You can probably control for the auto-correlation with an auto-regression multivariate model.