Working Paper: NBER ID: w23191
Authors: Robin Greenwood; Andrei Shleifer; Yang You
Abstract: We evaluate Eugene Fama’s claim that stock prices do not exhibit price bubbles. Based on US industry returns 1926-2014 and international sector returns 1985-2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up can all help forecast an eventual crash and future returns; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in US and international samples.
Keywords: bubbles; market efficiency; stock prices
JEL Codes: G02; G1; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sharp price increase of an industry portfolio (L11) | unusually low returns going forward (G17) |
| sharp price increase (P22) | heightened probability of a crash (R48) |
| characteristics of price runups (volatility and issuance patterns) (E44) | forecast an eventual crash (G17) |
| increases in volatility and issuance (G10) | predictive characteristics of future returns (G17) |