A dynamic valuation metric for S&P 500 based on Shiller P/E

Abstract

This research develops and back tests a dynamic valuation metric for the S&P 500 based on the Shiller P/E ratio, also known as the Cyclically Adjusted Price-to-Earnings (CAPE), providing a structured risk assessment from 0 (undervalued) to 1 (overvalued). Unlike static measures, the approach adjusts over time using rolling statistical metrics to establish a valuation corridor. Since it is a price-based metric, it can be accessed in real time allowing it to be systematically incorporated into long-term investment decisions. Back testing indicates improved returns compared to fixed investment strategies (Dollar-Cost Averaging, DCA), improving market evaluation for non-expert investors.

Outgoing