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Detecting stock market bubbles based on the cross-sectional dispersion of stock prices

Author

Listed:
  • Takayuki Mizuno

    (National Institute of Informatics)

  • Takaaki Ohnishi

    (Graduate School of Information Science and Technology, The University of Tokyo)

  • Tsutomu Watanabe

    (Graduate School of Economics, The University of Tokyo)

Abstract

A statistical method is proposed for detecting stock market bubbles that occur when speculative funds concentrate on a small set of stocks. The bubble is defined by stock price diverging from the fundamentals. A firm’s financial standing is certainly a key fundamental attribute of that firm. The law of one price would dictate that firms of similar financial standing share similar fundamentals.We investigate the variation in market capitalization normalized by fundamentals that is estimated by Lasso regression of a firm’s financial standing. The market capitalization distribution has a substantially heavier upper tail during bubble periods, namely, the market capitalization gap opens up in a small subset of firms with similar fundamentals. This phenomenon suggests that speculative funds concentrate in this subset. We demonstrated that this phenomenon could have been used to detect the dot-com bubble of 1998-2000 in different stock exchanges.

Suggested Citation

  • Takayuki Mizuno & Takaaki Ohnishi & Tsutomu Watanabe, 2019. "Detecting stock market bubbles based on the cross-sectional dispersion of stock prices," CARF F-Series CARF-F-463, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf463
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    References listed on IDEAS

    as
    1. Takaaki Ohnishi & Takayuki Mizuno & Tsutomu Watanabe, 2019. "House Price Dispersion in Boom-Bust Cycles: Evidence from Tokyo," CARF F-Series CARF-F-461, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Taisei Kaizoji, 2006. "Power laws and market crashes," Papers physics/0603138, arXiv.org.
    3. Kaizoji, Taisei & Miyano, Michiko, 2016. "Why does the power law for stock price hold?," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 19-23.
    4. Takayuki Mizuno & Takaaki Ohnishi & Tsutomu Watanabe, 2016. "Power laws in market capitalization during the Dot-com and Shanghai bubble periods," CARF F-Series CARF-F-392, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    5. Takayuki Mizuno & Takaaki Ohnishi & Tsutomu Watanabe, 2016. "Power laws in market capitalization during the Dot-com and Shanghai bubble periods," UTokyo Price Project Working Paper Series 070, University of Tokyo, Graduate School of Economics.
    6. Bala Arshanapalli & William Nelson, 2016. "Testing For Stock Price Bubbles: A Review Of Econometric Tools," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 10(4), pages 29-42.
    7. Darrell Jiajie Tay & Chung-I Chou & Sai-Ping Li & Shang You Tee & Siew Ann Cheong, 2016. "Bubbles Are Departures from Equilibrium Housing Markets: Evidence from Singapore and Taiwan," PLOS ONE, Public Library of Science, vol. 11(11), pages 1-13, November.
    8. Takaaki Ohnishi & Takayuki Mizuno & Tsutomu Watanabe, 2019. "House Price Dispersion in Boom-Bust Cycles: Evidence from Tokyo," Working Papers on Central Bank Communication 008, University of Tokyo, Graduate School of Economics.
    9. T. Kaizoji, 2006. "A precursor of market crashes: Empirical laws of Japan's internet bubble," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 50(1), pages 123-127, March.
    10. Takayuki Mizuno & Takaaki Ohnishi & Tsutomu Watanabe, 2016. "Power laws in market capitalization during the dot-com and Shanghai bubble periods," Evolutionary and Institutional Economics Review, Springer, vol. 13(2), pages 445-454, December.
    11. Stefan Palan, 2013. "A Review Of Bubbles And Crashes In Experimental Asset Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 570-588, July.
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