Bubble for Fama


Robin Greenwood, Andrei Shleifer, and Yang You. 1/2019. “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 08/18/2020