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.

Additional Metadata
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)
Persistent URL hdl.handle.net/1765/17525
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