Hug a Stock Market Bubble Today

Thought-provoking new paper out on investing around stock market bubbles:

We document patterns in U.S. industry returns that support riding bubbles as an optimal response, consistent with the theory of Abreu and Brunnermeier (2003). An investor who rides bubbles can earn abnormal returns in the order of 0.41% to 0.64% per month. However, these high returns come at the expense of a high crash risk: upon the detection of a bubble, the risk of a crash more than doubles. We evaluate the asset allocation implications of this tradeoff in a mean-downside risk framework. The additional return an investor can earn by riding a bubble more than offsets the higher risk of a crash. [Emphasis added]

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