Bubbles for Fama

Robin Greenwood; Andrei Shleifer; Yang You

doi:10.3386/w23191

Bubbles for Fama

Robin Greenwood, Andrei Shleifer & Yang You

Working Paper 23191

DOI 10.3386/w23191

Issue Date February 2017

We evaluate Eugene Fama’s claim that stock prices do not exhibit price bubbles. Based on US industry returns 1926-2014 and international sector returns 1985-2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up can all help forecast an eventual crash and future returns; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in US and international samples.

We thank Randy Cohen, Josh Coval, Harry DeAngelo, Eugene Fama, Niels Gormsen, Sam Hanson, Owen Lamont, Juhani Linnainmaa, Yueran Ma, Lubos Pastor, Jeremy Stein, Adi Sunderam, Tuomo Vuolteenaho, and seminar participants at the University of Chicago, the University of Southern California, and the Federal Reserve Bank of Boston for their helpful suggestions. We are especially grateful to Niels Gormsen for extensive advice on Compustat Xpressfeed and independent replication of the results. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Robin Greenwood
Robin Greenwood

This document contains a list of professional activities beyond my main employment at Harvard University. Please feel free to contact me with any questions about this disclosure statement.

Outside activities since 2008, paid and unpaid:

Academic Advisory Board, Martingale Asset Management (chairman) Consultant, Martingale Asset Management

AllianceBernstein, research presentation and consultation Capital structure consultation to two non-financial companies Associate Editor, Review of Financial Studies (unpaid) Editor, Review of Financial Studies (2014-present, unpaid)

Honoraria:

In 2014, the Brookings Institute paid me an honorarium for the working paper “Government Debt Management at the

Zero Lower Bound”

The Banco Central de Chile paid me an honorarium for the paper “Forward Guidance in the Yield Curve: Short Rates versus Bond Supply.”

No institution had any say on the content of these papers or on what I write.

Paid speeches and executive education:

HBS Investment Management Workshop (various years, since 2008) HBS Finance for Senior Executives (various years, unpaid before 2016) SanfordBernstein Research Conference

Robeco Q-Group Arrowstreet Capital Pyramis

Prudential

Windham Capital Management

Other:

Since September 2015, I have been a voting member on the Harvard University Committee on pensions. I do not do consulting work or make paid presentations to any investment managers employed or being considered by Harvard in this capacity.

As part of my work at Harvard Business School, I regularly write cases about hedge funds, investment managers, and their strategies. I receive no compensation from these managers for writing these cases, and the cases are not meant as endorsements of the managers or their strategies. I receive royalties (currently under $1500 per year) for cases I have written while employed at Harvard.

Last updated December 16, 2015
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