Does the cyclically adjusted price-to-earnings ratio work at the macroeconomic level? A Gulf Cooperation Council analysis

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

The study aims to investigate the application of the cyclically adjusted price-to-earnings (CAPE) ratio at the macroeconomic level within Gulf Cooperation Council (GCC) economies. The research problem seeks to explore the role of the CAPE ratio in enabling earnings prediction and the ratio’s relationship with other valuation metrics. The research methodology utilizes data from the World Bank and Refinitiv Eikon databases. Regression and vector autoregression (VAR) models value the markets at the country and regional levels. The primary variables are the CAPE ratio, price-to-sales (P/S) ratio, and earnings. Regression is used as the primary analytical technique. The sample is for the GCC region from 1999 to 2020. The study finds that the GCC countries (markets) behave differently under the influence of similar shocks and variables. The CAPE ratio was significant at the regional rather than the country level (Radha, 2018; Kenourgios et al., 2022). The study concludes that there is a need for granular market analyses and a reliable framework to facilitate better investment management and economic policy making. The paper’s relevance is that it offers new knowledge by demonstrating CAPE’s utility in macroeconomic valuation within underexplored contexts.

Keywords: CAPE Ratio, Earnings, Valuation, GCC Region, Valuation, Macroeconomics

Authors’ individual contribution: Conceptualization — W.S.; Methodology — W.S.; Software — W.S.; Validation — W.S.; Formal Analysis — W.S. and A.A.; Investigation — W.S. and A.A.; Resources — W.S. and A.A.; Data Curation — W.S.; Writing — Original Draft — W.S.; Writing — Review & Editing — W.S. and A.A.; Visualization — W.S. and A.A.; Supervision — W.S.; Project Administration — W.S.; Funding Acquisition — W.S. and A.A.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: E37, G12, G14, G15

Received: 23.09.2024
Revised: 10.12.2024; 24.02.2025; 27.03.2025
Accepted: 03.04.2025
Published online: 07.04.2025

How to cite this paper: Sbeiti, W., & Alqatan, A. (2025). Does the cyclically adjusted price-to-earnings ratio work at the macroeconomic level? A Gulf Cooperation Council analysis. Journal of Governance & Regulation, 14(2), 8–17. https://doi.org/10.22495/jgrv14i2art1