Bubble for Fama


Robin Greenwood, Andrei Shleifer, and Yang You. Forthcoming. “Bubble for Fama.” Journal of Financial Economics.



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 but not of a further price boom; (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; (4) these attributes also help forecast future returns. Results hold similarly in US and international samples. 



Last updated on 07/18/2018