Negative bubbles: What happens after a crash

Abstract

We study crashes using data from 101 global stock markets from 1692 to 2015. Extremely large, annual stock market declines are typically followed by positive returns. This is not true for smaller declines. This pattern does not appear to be driven by institutional frictions, financial crises, macroeconomic shocks, political conflicts, or survivorship issues.

Presidential Address: Social Transmission Bias in Economics and Finance

“…As the bubble collapses, the model implies that correction can overshoot. The fraction of infected declines below its long‐run equilibrium value, so that after the crash, prices correct upward again, consistent with the evidence in Goetzmann and Kim (2018). As in Fable 4, there is possible dead cat bounce.…”

Individual investors’ trading behavior in Moscow Exchange and the COVID-19 crisis

“…2 also suggests a negative bubble was formed during the sell-off in March–April. Following the practice in the recent empirical literature on bubbles, in particular Goetzman and Kim (2018) on negative bubbles, we define the negative bubble period based on ex post price action 25 and create a negative-bubble dummy variable, , which takes the value of 1 when the MOEX index was below its January–February 2020 pre-COVID average value by 20% or more and 0 otherwise. 26 Then, we add into Eq.…”

“…Despite ample theoretical and experimental work on bubbles, empirical studies of investor types’ aggregate trading during actual bubbles are scarce, Griffin et al (2011) being the only seminal work. Negative bubbles are an important component of this literature (see Goetzman and Kim, 2018 ). Hence, Russian data covering the COVID-episode offers an insightful assessment of individual investor sophistication during a notable overreaction episode.…”

“… 5 A negative bubble is a substantial and temporary (but persisting for sufficient time to be exploited) downside deviation of asset prices from their fundamental values (see Goetzman and Kim, 2018 ). The term was first used by Shiller (2000) .…”

“… 7 Given the difficulties in identifying bubbles (see Gürkaynak, 2008 ), most recent studies (e.g., Greenwood et al, 2019 and, particularly Goetzman and Kim, 2018 , on negative bubbles) rely on ex-post evaluation of stock price behavior. …”