Bubble detection and sector trading in real time |
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Authors: | George Milunovich David Tan |
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Institution: | 1. Department of Economics, Macquarie University , Sydney, NSW 2113, Australia.;2. School of Aviation, University of New South Wales , Sydney, NSW 2200, Australia. |
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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. |
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Keywords: | Speculative bubbles Price-earnings ratio Explosive dynamics Real-time trading Stochastic dominance |
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