Entering text into the input field will update the search result below

Graham Vs. Shiller: Is The U.S. Stock Market Overvalued?

Mar. 05, 2018 8:41 AM ET2 Comments
Valeriy Zakamulin profile picture
Valeriy Zakamulin


  • Two leading equity valuation models are the Shiller CAPE model and the Fed model.
  • The models provide opposing views on whether the stock market is overvalued.
  • The empirical validity of the Graham model, which generalizes the Fed model, is studied.
  • The Fed model is found to be valid over 1958-2010 only.
  • It is argued, therefore, that the Fed model cannot support the high current CAPE ratio on the grounds of the low-rate environment.

Editor's note: Seeking Alpha is proud to welcome Valeriy Zakamulin as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »

When stock prices reach a new high, the key question investors seek answer to: "Are stocks overvalued?" To answer this question, investors have developed several alternative equity valuation models. Typically, each of this models compares the stock market's current price level to a benchmark. Among practitioners, two of the leading equity valuation models are the Shiller CAPE model and the so-called Fed model.

At the 70th Annual CFA Institute Conference in 2017, there was a heated debate between Robert Shiller and Jeremy Siegel on whether the U.S. stock market is overvalued. On the one hand, Robert Shiller, the distinguished Yale economist and Nobel Laureate, claimed that the U.S. stock market is highly overvalued judging by the current CAPE ratio. On the other hand, Jeremy Siegel, the author of "Stocks for the Long Run", remarked that, given the extremely low interest rates, the U.S. stock market is not overvalued. Janet Yellen, the previous Fed Chair, held the same opinion as Jeremy Siegel. In particular, at the end of 2017 she said that "the low-rate environment is supportive of higher CAPE ratio." Apparently, both Jeremy Siegel and Janet Yellen use the Fed model to determine whether the U.S. stock market is overvalued.

Shiller CAPE Model

CAPE stands for the "Cyclically Adjusted Price-to-Earnings ratio". It is the ratio of the price of the S&P 500 index to the 10-year moving average of earnings. The Shiller CAPE model was introduced by Campbell and Shiller (1998) and further popularized and developed by Shiller (2005). The Shiller model is based on a simple mean reversion

This article was written by

Valeriy Zakamulin profile picture
Valeriy Zakamulin is Professor of Finance at the School of Business and Law, University of Agder, Norway, where he teaches graduate courses in Finance. His first graduate academic degree is a MS in Radio Engineering. After receiving this degree, Valeriy Zakamulin had been working for many years as a research fellow at a computer science department, developing both computer hardware and software. Later on Valeriy Zakamulin received a MS in Economics and Business Administration and a PhD in Finance. He has published more than 30 articles in various refereed academic and practitioner journals and is a frequent speaker at international conferences. He has also served on editorial boards of several economics and finance journals. His current research interests cover behavioral finance, portfolio optimization, time-series analysis of financial data, financial asset return and risk predictability, and technical analysis of financial markets.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (2)

Stefanoemilio profile picture
In your paper with Arngrim Hunnes that you have quoted above, you say that the Graham and Dodd model can be justified on the grounds of the Dividend Discount Model under assumptions that D = E and Rf = Y, however this does not seem to me to be the case because you also have a growth term (e.g. in equation 2 of your paper) which is absent in the Graham and Dodd model (equation 3 of your paper)
panzer profile picture
what's a girl to do? My answer: if everything is just relative and who knows, a girl should keep it simple, KISS, and simply sell commodities in the spring, which is basically here now. Sell in May and go Away. Problem being, if you wait till May, your portfolio has already been destroyed. .SO SELL NOW, at least in commodities.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.