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Riding Bubbles

  • Günster, N.K.
  • Kole, H.J.W.G.
  • Jacobsen, B.

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.

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Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam in its series ERIM Report Series Research in Management with number ERS-2009-058-F&A.

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Date of creation: 10 Dec 2009
Date of revision:
Handle: RePEc:ems:eureri:17525
Contact details of provider: Postal: RSM Erasmus University & Erasmus School of Economics, PoBox 1738, 3000 DR Rotterdam
Phone: 31-10-408 1182
Fax: 31-10-408 9020
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