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Bubbles for Fama

Listed author(s):
  • Robin Greenwood
  • Andrei Shleifer
  • Yang You

We evaluate Eugene Fama’s claim that stock prices do not exhibit price bubbles. Based on US industry returns 1926-2014 and international sector returns 1985-2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up can all help forecast an eventual crash and future returns; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in US and international samples.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23191.

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Date of creation: Feb 2017
Handle: RePEc:nbr:nberwo:23191
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  1. Charles Lee & Andrei Shleifer & Richard Thaler, 1990. "Investor Sentiment and the Closed-End Fund Puzzle," NBER Working Papers 3465, National Bureau of Economic Research, Inc.
  2. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2000. "Forecasting Crashes: Trading Volume, Past Returns and Conditional Skewness in Stock Prices," NBER Working Papers 7687, National Bureau of Economic Research, Inc.
  3. Owen A. Lamont & Richard H. Thaler, 2001. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs," NBER Working Papers 8302, National Bureau of Economic Research, Inc.
  4. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
  5. Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Scholarly Articles 3128707, Harvard University Department of Economics.
  6. Lubos Pastor & Pietro Veronesi, 2004. "Was There a Nasdaq Bubble in the Late 1990s?," NBER Working Papers 10581, National Bureau of Economic Research, Inc.
  7. William N. Goetzmann, 2015. "Bubble Investing: Learning from History," NBER Working Papers 21693, National Bureau of Economic Research, Inc.
  8. Kenneth A. Froot & Emil Dabora, 1998. "How are Stock Prices Affected by the Location of Trade?," NBER Working Papers 6572, National Bureau of Economic Research, Inc.
  9. Eli Ofek & Matthew Richardson, 2003. "DotCom Mania: The Rise and Fall of Internet Stock Prices," Journal of Finance, American Finance Association, vol. 58(3), pages 1113-1138, 06.
  10. White, Eugene N, 1990. "The Stock Market Boom and Crash of 1929 Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 67-83, Spring.
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