CAPE Ratio as a Prediction Tool for the  Stock Exchange of Thailand (SET)

Budsabawan Maharakkhaka; Boonyachote  Suteerawattananon; Sirikarn  Tirasuwanvasee; Sutatt  Ramasoot

Budsabawan Maharakkhaka Stamford International University, Thailand
Boonyachote Suteerawattananon North-Chiang Mai University, Thailand
Sirikarn Tirasuwanvasee Rajamangala University of Technology Phra Nakhon, Thailand
Sutatt Ramasoot Stamford International University, Thailand

Keywords: Shiller PE, Cyclically Adjusted PE, CAPE ratio, The Stock Exchange of Thailand

Abstract

This study investigates the predictability of the Cyclically Adjusted Price-Earning (CAPE) ratio (or Shiller PE ratio) on the returns of the Stock Exchange of Thailand (SET), currently the second largest capital market in South-East Asia. Most empirical research studies on the CAPE ratio performance focus on the U.S. equity market and very few on the Thai capital market; hence this research study. Using regression models and cointegration analyses, this paper examines the ability of the CAPE ratio to forecast returns as compared to the ability of the price-earnings ratio and the book-to-value ratio, respectively. The regression estimation shows no significant relationship between the CAPE ratio and the real future returns on the SET. The cointegration analysis, however, reveals a significant long-term cointegration relation between the ratio and the returns on the SET. Among the three ratios considered in the study, the price-earnings ratio is the only one that has a significant relationship with the returns in the regression model. All three ratios show a significant cointegration relation with SETs returns.