Template-Type: ReDIF-Paper 1.0
Author-Name: Günster, N.K.
Author-Name-Last: Günster
Author-Name-First: Nadja
Author-Name: Kole, H.J.W.G.
Author-Name-Last: Kole
Author-Name-First: Erik
Author-Person: pko187
Author-Name: Jacobsen, B.
Author-Name-Last: Jacobsen
Author-Name-First: Ben
Title: Riding Bubbles
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.
Creation-Date: 2009-12-10
File-URL: https://repub.eur.nl/pub/17525/ERS-2009-058-FA.pdf
File-Format: application/pdf
Series: RePEc:ems:eureri
Number: ERS-2009-058-F&A
Classification-JEL: C14, G10, G14
Keywords: asset pricing model, bubbles, limits to arbitrage, market efficiency, structural breaks
Handle: RePEc:ems:eureri:17525