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Stock market bubble detection based on the price dispersion among similar listed Firms

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  • Mizuno, Takayuki
  • Ohnishi, Takaaki
  • Watanabe, Tsutomu

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 investigated the variation in market capitalization among those firms. Even during non-bubble periods, the market capitalization was distributed. The market capitalization distribution grew fat 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

  • Mizuno, Takayuki & Ohnishi, Takaaki & Watanabe, Tsutomu, 2017. "Stock market bubble detection based on the price dispersion among similar listed Firms," HIT-REFINED Working Paper Series 67, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:remfce:67
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    References listed on IDEAS

    as
    1. 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.
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    5. 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.
    6. Kaizoji, Taisei & Miyano, Michiko, 2016. "Why does the power law for stock price hold?," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 19-23.
    7. 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.
    8. 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.
    9. 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.
    10. Mizuno, Takayuki & Ohnishi, Takaaki & Watanabe, Tsutomu, 2016. "Power law in market capitalization during Dot-com and Shanghai bubble periods," HIT-REFINED Working Paper Series 60, Institute of Economic Research, Hitotsubashi University.
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