Speculative Bubbles and the Cross-Sectional Variation in Stock Returns

27 Pages Posted: 16 Nov 2012 Last revised: 3 Nov 2013

See all articles by Keith P. Anderson

Keith P. Anderson

The York Management School

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Date Written: November 2013

Abstract

Evidence suggests that rational, periodically collapsing speculative bubbles may be pervasive in stock markets globally, but there is no research that considers them at the individual stock level. In this study we develop and test an empirical asset pricing model that allows for speculative bubbles to affect stock returns. We show that stocks incorporating larger bubbles yield higher returns. The bubble deviation, at the stock level as opposed to the industry or market level, is a priced source of risk that is separate from the standard market risk, size and value factors. We demonstrate that much of the common variation in stock returns that can be attributable to market risk is due to the co-movement of bubbles rather than being driven fundamentals.

Keywords: speculative bubbles, asset pricing, stock returns, CAPM, cross-sectional variation

JEL Classification: G11, G14, C21, C22

Suggested Citation

Anderson, Keith P. and Brooks, Chris, Speculative Bubbles and the Cross-Sectional Variation in Stock Returns (November 2013). Available at SSRN: https://ssrn.com/abstract=2176444 or http://dx.doi.org/10.2139/ssrn.2176444

Keith P. Anderson

The York Management School ( email )

York YO10 5DD
United Kingdom

Chris Brooks (Contact Author)

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

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