Bubbles for Fama from Sornette

75 Pages Posted: 30 Dec 2021 Last revised: 27 Sep 2022

See all articles by Dongshuai Zhao, CFA

Dongshuai Zhao, CFA

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)

Didier Sornette

Risks-X, Southern University of Science and Technology (SUSTech); Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Tokyo Institute of Technology

Date Written: December 20, 2021

Abstract

We present strong evidence that financial bubbles can be identified ex-ante and that a sharp price increase, when suitably qualified by a bubble indicator called LPPLS confidence, does on average predict unusually low returns going forward. For this, we use a methodology called log-periodic power law singularity (LPPLS) combined with the event study method applied to industry sectors in China over 2005–2020 and the US over 2009–2020. We identify a new class of apparent bubble regimes corresponding to the convergence to a stable price level, which can be disentangled using LPPLS-based indicators from standard bubbles followed by crashes.

Keywords: Bubbles, Log-periodic power law singularity, Confidence indicator, Bubble crash, drawdown

JEL Classification: C20, C40, C53, G01, G17

Suggested Citation

Zhao, Dongshuai and Sornette, Didier, Bubbles for Fama from Sornette (December 20, 2021). Swiss Finance Institute Research Paper No. 21-94, Available at SSRN: https://ssrn.com/abstract=3995526 or http://dx.doi.org/10.2139/ssrn.3995526

Dongshuai Zhao

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

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Didier Sornette (Contact Author)

Risks-X, Southern University of Science and Technology (SUSTech) ( email )

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