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Trading Rules from Forecasting the Collapse of Speculative Bubbles for the S&P 500 Composite Index

Chris Brooks and Apostolos Katsaris
The Journal of Business
Vol. 78, No. 5 (September 2005), pp. 2003-2036
DOI: 10.1086/431450
Stable URL: http://www.jstor.org/stable/10.1086/431450
Page Count: 34
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Trading Rules from Forecasting the Collapse of Speculative Bubbles for the S&P; 500 Composite Index
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Abstract

Many recent studies documented the presence of speculative bubbles, defined as systematic and increasing deviations of actual prices from fundamentals, in asset prices. However, thus far, the usefulness of such models has been examined in the literature only from a statistical perspective. In this paper, we employ two‐regime switching models of periodically partially collapsing speculative bubbles and examine the risk‐adjusted profits of trading rules formed using inferences from them. Use of trading rules derived from an augmented model incorporating market volume leads to higher risk‐adjusted returns than those obtained employing existing models or a buy‐and‐hold strategy.

Notes and References

This item contains 28 references.

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