VIX futs not that useful as they are forwards on 30-day realized variance, so include (i) vol risk premium (forward vol an upward biased estimate of future realized vol) and (ii) variance risk premium (var is convex wrt vol) and both of those are time-varying
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AQR (I think?) had a paper basically debunking the cape ratio for market timing by pointing out that using overlapping 10Y returns on the lhs of a regression and trying to adjust t-stats with newey-west is hopelessly optimistic
Instead you should use non-overlapping 1M returns on the lhs but smooth the regressors with a 10Y moving average, which gives the exact same regression coefficients but now you have non overlapping samples so you can do a normal t-test
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And if you do that you find that the evidence for CAPE predicting equity returns is incredibly weak, t-stat is like 1.5 or something
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Guess you just answered my previous question...
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Hey, you've got some interesting ideas. Have you tried that and compared to the "standard" way of doing it (similar to Hussman)?
Thanks. Twitter will use this to make your timeline better. UndoUndo
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Wait - isn't it possible 1M returns aren't very predictable but 10Y returns are? That's the whole theory of long-term valuations: short-term is dominated by noise, long-term much more predictable.
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That’s the cool thing about smoothing the regressor with a 10Y MA — it incorporates long horizon predictability but in a way which makes the statistical inference more reliable! The regr coefficients are identical, it is testing exactly the same thing but with better inference.
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