Econometrics Colloquium Seminar: Bubble Detection and Sector Trading in Real Time

George Milunovich | Macquarie University

We conduct a pseudo real-time analysis of the existence and extent of speculative bubbles in eleven 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 three other investments (two alternative active strategies as well as the buy-and-hold investment in the market index). Subsample analysis and specification checks confirm the robustness of the findings.