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

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  • 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.

Suggested Citation

  • Chris Brooks & Apostolos Katsaris, 2005. "Trading Rules from Forecasting the Collapse of Speculative Bubbles for the S&P 500 Composite Index," The Journal of Business, University of Chicago Press, vol. 78(5), pages 2003-2036, September.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:5:p:2003-2036
    DOI: 10.1086/431450
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    Citations

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    Cited by:

    1. Angelos Dassios & Luting Li, 2018. "An Economic Bubble Model and Its First Passage Time," Papers 1803.08160, arXiv.org.
    2. 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, June.
    3. Nneji, Ogonna, 2015. "Liquidity shocks and stock bubbles," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 35(C), pages 132-146.
    4. 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.
    5. Ogonna Nneji & Charles Ward, 2011. "An investigation of bubble spillovers from the stock market and the residential property market to REITs," ERES eres2011_75, European Real Estate Society (ERES).
    6. Anderson, Keith & Brooks, Chris & Katsaris, Apostolos, 2010. "Speculative bubbles in the S&P 500: Was the tech bubble confined to the tech sector?," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 345-361, June.
    7. Yiannis Karavias & Stella Spilioti & Elias Tzavalis, 2021. "Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1593-1621, May.
    8. Ogonna Nneji & Chris Brooks & Charles Ward, 2011. "Housing and equity bubbles: Are they contagious to REITs?," ICMA Centre Discussion Papers in Finance icma-dp2011-11, Henley Business School, University of Reading.
    9. Bell, Adrian R. & Brooks, Chris & Killick, Helen, 2022. "The first real estate bubble? Land prices and rents in medieval England c. 1300–1500," Research in International Business and Finance, Elsevier, vol. 62(C).
    10. Anderson, Keith & Brooks, Chris, 2014. "Speculative bubbles and the cross-sectional variation in stock returns," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 20-31.
    11. Frank J. Fabozzi & Iason Kynigakis & Ekaterini Panopoulou & Radu S. Tunaru, 2020. "Detecting Bubbles in the US and UK Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 60(4), pages 469-513, May.
    12. 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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