A0778
Title: Yes, Virginia, there is still hope: Twenty years of sector rotation with Shiller's CAPE ratio
Authors: Luc Dumontier - Paris Dauphine and Ossiam (France) [presenting]
Carmine De Franco - Ossiam (France)
Abstract: The CAPE ratio devised by Campbell and Shiller and the derived relative CAPE ratio has been used to design a range of rule-based strategies that aim to outperform major equity benchmarks by dynamically selecting sectors that appear most undervalued or least overvalued. The standard version, the Shiller Barclays CAPE US value sector index, has been backtested since September 3rd, 2002, with a live out-of-sample period beginning on October 5th, 2012. After ten years of live track record, this strategy has shown solid risk-adjusted outperformance relative to the S\&P 500 index, statistically in line with the promises of the in-sample backtest conducted over the previous ten years. The implementation shortfall proved limited as investment funds replicating this paper-trading strategy were able to maintain a solid risk-adjusted outperformance. Results point out that strong performance is a matter of skill rather than luck. The strategy has delivered true sector rotation alpha that remains unexplained by standard factors and is consistent over time, crisis periods, and across dispersion regimes. Furthermore, most of the alpha comes from the signal, as results are robust to a wide range of parameter changes in portfolio construction.
