Bubble detection and sector trading in real time. Issue 2 (1st February 2019)

• Record Type: Journal Article
• Authors: Milunovich, George; Shi, Shuping; Tan, David
• Is Part Of: Quantitative finance. Volume 19:Issue 2(2019)
• Page Start: 247
• Page End: 263
• Publication Date: 2019-02-01
• Subjects: Speculative bubbles -- Price-earnings ratio -- Explosive dynamics -- Real-time trading -- Stochastic dominance; C12 -- C22 -- G01 -- G11; Finance -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Investments -- Mathematics -- Periodicals; Economics -- Periodicals; Finances -- Modèles mathématiques -- Périodiques; 332.015118
• DOI: 10.1080/14697688.2018.1459811
• Languages: English
• ISSNs: 1469-7688

Abstract

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.