Riksbank studies link between equity prices and interest rates
Measures that do not directly account for interest rates can better explain historical prices
Equity price ratios that do not directly take into account interest rates provide a better explanation for historical stock prices, says research conducted by Sveriges Riksbank.
The cyclically-adjusted price-to-earnings (Cape) ratio, a valuation measure that uses real earnings per share over a 10-year period, is a good guide to the evolution of prices, the paper finds. But the excess Cape yield, a measure of the relative return of equities over bonds that directly takes into account the level
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