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Trading Rules from Forecasting the Collapse of Speculative Bubbles for the S&P 500 Composite Index

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Author Info

  • Chris Brooks

    (Cass Business School)

  • Apostolos Katsaris

    (Cass Business School)

Abstract

Many recent studies documented the presence of speculative bubbles, defined as systematic and increasing deviations of actual prices from fundamentals, in asset prices. However, thus far, the usefulness of such models has been examined in the literature only from a statistical perspective. In this paper, we employ two-regime switching models of periodically partially collapsing speculative bubbles and examine the risk-adjusted profits of trading rules formed using inferences from them. Use of trading rules derived from an augmented model incorporating market volume leads to higher risk-adjusted returns than those obtained employing existing models or a buy-and-hold strategy.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 5 (September)
Pages: 2003-2036

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Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:2003-2036

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. David G. McMillan, 2010. "Present Value Model, Bubbles and Returns Predictability: Sector-Level Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5-6), pages 668-686.
  2. Campello, Murillo & Graham, John R., 2013. "Do stock prices influence corporate decisions? Evidence from the technology bubble," Journal of Financial Economics, Elsevier, vol. 107(1), pages 89-110.

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