Bubble Investing: Learning from History

18 Pages Posted: 26 May 2016  

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2016

Abstract

History is important to the study of financial bubbles precisely because they are extremely rare events, but history can be misleading. The rarity of bubbles in the historical record makes the sample size for inference small. Restricting attention to crashes that followed a large increase in market level makes negative historical outcomes salient. In this paper I examine the frequency of large, sudden increases in market value in a broad panel data of world equity markets extending from the beginning of the 20th century. I find the probability of a crash conditional on a boom is only slightly higher than the unconditional probability. The chances that a market gave back it gains following a doubling in value are about 10%. In simple terms, bubbles are booms that went bad. Not all booms are bad.

JEL Classification: N2, G01, G14

Suggested Citation

Goetzmann, William N., Bubble Investing: Learning from History (January 11, 2016). Available at SSRN: https://ssrn.com/abstract=2784281 or http://dx.doi.org/10.2139/ssrn.2784281

William N. Goetzmann (Contact Author)

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