Speculative bubble and the cross-sectional variation in stock returns

TY - JOUR

T1 - Speculative bubble and the cross-sectional variation in stock returns

AU - Anderson, Keith Philip

AU - Brooks, Chris

PY - 2014/10

Y1 - 2014/10

N2 - Evidence suggests that rational, periodically collapsing speculative bubbles may be pervasive in stock markets globally, but there is no research that considers them at the individual stock level. In this study we develop and test an empirical asset pricing model that allows for speculative bubbles to affect stock returns. We show that stocks incorporating larger bubbles yield higher returns. The bubble deviation, at the stock level as opposed to the industry or market level, is a priced source of risk that is separate from the standard market risk, size and value factors. We demonstrate that much of the common variation in stock returns that can be attributable to market risk is due to the co-movement of bubbles rather than being driven by fundamentals.

AB - Evidence suggests that rational, periodically collapsing speculative bubbles may be pervasive in stock markets globally, but there is no research that considers them at the individual stock level. In this study we develop and test an empirical asset pricing model that allows for speculative bubbles to affect stock returns. We show that stocks incorporating larger bubbles yield higher returns. The bubble deviation, at the stock level as opposed to the industry or market level, is a priced source of risk that is separate from the standard market risk, size and value factors. We demonstrate that much of the common variation in stock returns that can be attributable to market risk is due to the co-movement of bubbles rather than being driven by fundamentals.

KW - Speculative bubbles

KW - Asset pricing

KW - Stock returns

KW - CAPM

KW - Cross-sectional variation

U2 - 10.1016/j.irfa.2014.07.004

DO - 10.1016/j.irfa.2014.07.004

M3 - Article

SN - 1057-5219

VL - 35

SP - 20

EP - 31

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

ER -