Speculative bubbles and the cross-sectional variation in stock returns

Abstract

Evidence suggests that rational, periodically collapsing speculative bubbles may be pervasive in stock markets globally, but there is no research that considers them at the individual stock level. In this study we develop and test an empirical asset pricing model that allows for speculative bubbles to affect stock returns. We show that stocks incorporating larger bubbles yield higher returns. The bubble deviation, at the stock level as opposed to the industry or market level, is a priced source of risk that is separate from the standard market risk, size and value factors. We demonstrate that much of the common variation in stock returns that can be attributable to market risk is due to the co-movement of bubbles rather than being driven fundamentals. EFM classification codes: 310, 330, 350 Acknowledgements: We are grateful to Rajesh Tharyan for providing a list of SEDOL codes matched with those from Datastream, and to Apostolos Katsaris, discussions with whom helped to shape the ideas for this paper.1

Measuring uncertainty in the stock market

“…as is required by the traditional EMH. Examples of such studies include Zhou and Sornette (2003), Sornette and Zhou (2004), Sornette et al (2009), , Homm and Breitung (2012), Phillips et al (2012), Anderson and Brooks (2014) and Yuhn et al (2015). Second, predicting the equity premium has been demonstrated as being possible and utility gains can be achieved by using forecasting models to allocate portfolio resources (Rapach and Zhou, 2013;Almadi et al, 2014;Neely et al, 2014).…”

Empirical evidence of the existence of speculative bubbles in the prices of stocks traded on the São Paulo Stock Exchange

“…Literature about speculative bubbles (Al-Anaswah & Wilfling, 2011;Anderson & Brooks, 2014;Madrid & Hierro, 2015) has mostly used the present value of dividends as a representative variable for the intrinsic value of stocks. For Smith, Suchanek, and Williams (1988), the actual value of a specific stock converges with a value equivalent to the flow of expected dividends for that stock, as adjusted by a risk factor related to the business and brought to the present value.…”

“…The theoretical basis for understanding the phenomenon of speculative bubbles can be traced to Keynes (1936) perspective that compares the stock market to a beauty pageant. As in a beauty pageant, in the stock market there are speculators seeking to anticipate what will be the market's opinion in the near future, trying to predict the opinion of the average investor, looking to gain profits by taking advantage of sudden increases or losses in values of stocks and bonds (Al-Anaswah & Wilfling, 2011;Anderson & Brooks, 2014;Tran, 2016). Blanchard and Watson (1983) demonstrated, in pioneering research, a perspective for approaching bubbles that affirms fundamentals are only one part of determining stock prices.…”

Análisis de procesos explosivos en el precio de los activos financieros: evidencia alrededor del mundo

“…H0: Pt=Pt-1+ut, t≥1 [3] En otras palabras, se trata de probar la hipó-tesis nula de caminata aleatoria versus la alternativa de un proceso explosivo lineal o no lineal bajo los supuestos 1 y 2.…”

“…Si es ecuación se cumple, entonces se rechaza la hipótesis nula de caminata aleatoria expuesta en [3]. Signo(•) es el signo de u t , y está definido como…”