Riding Bubbles

Nadja Günster, Erik Kole () and Ben Jacobsen

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

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: asset pricing model; bubbles; limits to arbitrage; market efficiency; structural breaks (search for similar items in EconPapers)
JEL-codes: C14 G10 G14 (search for similar items in EconPapers)
Date: 2009-12-10
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Citations: View citations in EconPapers (1)

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