Bubble Detection and Sector Trading in Real Time

38 Pages Posted: 23 Aug 2016 Last revised: 27 Nov 2017

See all articles by George Milunovich

George Milunovich

Macquarie University - Department of Economics; Macquarie University, Macquarie Business School

Shuping Shi

Department of Economics, Macquarie University

David Tan

University of New South Wales (UNSW)

Date Written: May 17, 2017

Abstract

We conduct a pseudo real-time analysis of the existence and severity of speculative bubbles in eleven US sectors over the period 1973-2015. Based on the real-time bubble signals, a trading strategy is constructed which switches funds between the market index and those industry sectors that exhibit bubble dynamics. Our strategy generates highest after-transaction-cost return and Sharpe ratio, and first-order stochastically dominates three other investments (including two alternative active strategies as well as the buy-and-hold investment in the market index). Subsample analysis and specification checks confirm the robustness of the reported findings.

Keywords: Speculative bubbles, price-earnings ratio, explosive dynamics, real-time trading, stochastic dominance

JEL Classification: C12, C22, G01, G11

Suggested Citation

Milunovich, George and Shi, Shuping and Tan, David, Bubble Detection and Sector Trading in Real Time (May 17, 2017). Available at SSRN: https://ssrn.com/abstract=2827051 or http://dx.doi.org/10.2139/ssrn.2827051

George Milunovich (Contact Author)

Macquarie University - Department of Economics ( email )

Sydney NSW 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Shuping Shi

Department of Economics, Macquarie University ( email )

New South Wales 2109
Australia

David Tan

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
404
Abstract Views
1,246
rank
73,758
PlumX Metrics