Speculative Bubbles and the Cross-Sectional Variation in Stock Returns

Chris Brooks and Keith Anderson
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Keith Anderson: The York Management School

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

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 (search for similar items in EconPapers)
JEL-codes: C21 C22 G11 G14 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012-11, Revised 2013-11
New Economics Papers: this item is included in nep-rmg
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Related works:
Journal Article: Speculative bubbles and the cross-sectional variation in stock returns (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2013-01

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