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|
|JEL||Semiparametric and Nonparametric Methods (jel C14), General Financial Markets: General (jel G10), Information and Market Efficiency; Event Studies (jel G14)|
|Publisher||Erasmus Research Institute of Management (ERIM)|
Günster, N.K, Kole, H.J.W.G, & Jacobsen, B. (2009). Riding Bubbles (No. ERS-2009-058-F&A). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/17525