Bubble detection and sector trading in real time

George Milunovich, Shuping Shi*, David Tan

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Citation (Scopus)
36 Downloads (Pure)

Abstract

We conduct a pseudo real-time analysis of the existence and extent of speculative bubbles in 11+ US sectors over the period January 1973–May 2015. Based on computed bubble signals, a trading strategy is constructed which switches funds between the market index and those industry sectors that exhibit bubble dynamics. Our strategy generates the highest after-transaction-cost return and Sharpe ratio, and first-order stochastically dominates a range of alternative strategies we consider, including the buy-and-hold investment in the market index. Subsample analysis and specification checks confirm the robustness of our findings.

Original languageEnglish
Pages (from-to)247-263
Number of pages17
JournalQuantitative Finance
Volume19
Issue number2
Early online date8 Jun 2018
DOIs
Publication statusPublished - 1 Feb 2019

Keywords

  • Speculative bubbles
  • Price-earnings ratio
  • Explosive dynamics
  • Real-time trading
  • Stochastic dominance

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