Stock market bubble detection based on the price dispersion among similar listed Firms

Takayuki Mizuno, Takaaki Ohnishi and Tsutomu Watanabe

No 67, HIT-REFINED Working Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: A statistical method is proposed for detecting stock market bubbles that occur when speculative funds concentrate on a small set of stocks. The bubble is defined by stock price diverging from the fundamentals. A firm’s financial standing is certainly a key fundamental attribute of that firm. The law of one price would dictate that firms of similar financial standing share similar fundamentals. We investigated the variation in market capitalization among those firms. Even during non-bubble periods, the market capitalization was distributed. The market capitalization distribution grew fat during bubble periods, namely, the market capitalization gap opens up in a small subset of firms with similar fundamentals. This phenomenon suggests that speculative funds concentrate in this subset.We demonstrated that this phenomenon could have been used to detect the dot-com bubble of 1998-2000 in different stock exchanges.

Keywords: Stock market; Financial bubble; Nowcast; Power law (search for similar items in EconPapers)
Pages: 8 pages
Date: 2017-04
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