Riding Bubbles
64 Pages Posted: 17 May 2010
There are 2 versions of this paper
Riding Bubbles
Date Written: December 10, 2009
Abstract
Bubbles can persist because investors are better off riding bubbles. We define bubbles in a natural way as significant, prolonged deviations from fundamental values measured by the well-known asset pricing models. Our real-time bubble detection system shows that –using US industry returns– periods of both higher volatility and higher abnormal returns follow noisy positive bubble signals. However, for the typical investor the risk-return trade-off improves. Riding bubbles generates annual abnormal returns of three to nine percent. These conclusions are robust to different assumptions and our system allows for alternative multifactor models as proxies for fundamental value.
Keywords: market efficiency, structural breaks, bubbles, asset pricing model, limits to arbitrage
JEL Classification: G14, C14, G10
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Andrew Ang, Joseph Chen, ...
-
By Joseph Chen, Andrew Ang, ...
-
Portfolio Selection with Higher Moments
By Campbell R. Harvey, John Liechty, ...
-
Optimal Portfolio Allocation Under Higher Moments
By Eric Jondeau and Michael Rockinger
-
Optimal Portfolio Allocation Under Higher Moments
By Eric Jondeau and Michael Rockinger
-
Optimal Portfolio Choice Under Regime Switching, Skew and Kurtosis Preferences
By Allan Timmermann and Massimo Guidolin
-
Downside Correlation and Expected Stock Returns
By Andrew Ang, Joseph Chen, ...
-
Modeling Asymmetry and Excess Kurtosis in Stock Return Data
By Gamini Premaratne and Anil K. Bera
-
Is Beta Still Alive? Conclusive Evidence from the Swiss Stock Market
By Dušan Isakov