Bubble Investing: Learning from History

NBER Working Paper No. 21693

Issued in October 2015, Revised in January 2016

NBER Program(s):Asset Pricing



History is important to the study of financial bubbles precisely because they are extremely rare events, but history can be misleading. The rarity of bubbles in the historical record makes the sample size for inference small. Restricting attention to crashes that followed a large increase in market level makes negative historical outcomes salient. In this paper I examine the frequency of large, sudden increases in market value in a broad panel data of world equity markets extending from the beginning of the 20th century. I find the probability of a crash conditional on a boom is only slightly higher than the unconditional probability. The chances that a market gave back it gains following a doubling in value are about 10%. In simple terms, bubbles are booms that went bad. Not all booms are bad.

A non-technical summary of this paper is available in the January 2016 NBER Digest. You can sign up to receive the NBER Digest by email.



Acknowledgments

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Document Object Identifier (DOI): 10.3386/w21693

Published: Goetzmann William N. Research Foundation Books 2016 2016:3, 149-168

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