Riding asset bubbles

On June 30, Nadja Günster has defended her PhD thesis entitled “Investment Strategies Based on Social Responsibility and Bubbles”. What should investors do if they learn about a stock market bubble? Is it a bad plan to invest in a stock market bubble? Take for example the internet or the housing bubble. Many investors gained, but also many lost. So, what would have been the right strategy beforehand? In her PhD thesis, Nadja Günster analyses this question based on a large sample of bubbles. Her approach takes into account that investors do not know for sure that a bubble is inflating, nor when it may crash. She shows that investing in a bubble produces high average returns but also big price drops in returns from time to time. Overall, the gains outweigh the losses and investing in bubbles is a profitable strategy. Günster concludes that an investor in bubbles is not simply blind for risks but may have made a rational and wise decision.

About Nadja Günster:
After Nadja Günster obtained her Gymnasium diploma in 1997, she went to study Economics at Maastricht University, The Netherlands. The curriculum was first centered on courses in Micro- and Macroeconomics, but she developed an interest in Finance towards the end of her study program. Next to her studies, Nadja was a research department intern at Linsco-Private-Ledger (LPL) in Boston, MA, in 1999. In 2000, Nadja went on an exchange to Brandeis University, Waltham, MA. In 2001, Nadja worked at the Quantitative Research Department of Strategic Advisers, a division of Fidelity Investments in Boston, MA. Nadja wrote her master thesis on "Corporate Governance in Europe", parts of which have been published in Dutch magazines like ESB and the VBA Journaal, as well as the Journal of Asset Management.

Following her studies, Nadja obtained a PhD position at RSM Erasmus University Rotterdam, The Netherlands in 2003. Her PhD position was supervised by Prof. Dr. Kees Koedijk and sponsored by Erasmus Research Institute of Management (ERIM). During her time as a PhD candidate, Nadja obtained substantial teaching experience in the International Business Administration (IBA) Program of RSM. She had the opportunity to spend several months at the Finance Department at Ohio State University. Her research output has been presented at various conferences such as the SoFiE annual meeting, the McGill Global Asset Management Conference, the Academy of Management Annual Meeting, and the European Winter Finance Conference. It has been published in outlets such as the Financial Analysts Journal. Her ESG research has been awarded the 2005 Moskowitz Prize by the Haas School of Business at the University of California, Berkeley, for best study in the SRI domain, and the 2005 European Finance & Sustainability Research Award.

Currently, Nadja Günster is Assistant Professor of Finance at Maastricht University. Her research focuses on Corporate Governance, Corporate Social Responsibility and Asset Price Bubbles. Nadja is also a member of the judging committee of the Moskowitz Prize and a member of the European Center of Corporate Engagement (ECCE).

Abstract:
Günster empirically analyses the optimal strategy of a rational investor who learns about a bubble in stock prices. Her empirical approach provides new insights since theoretical predictions vary between going short, sidelining, and riding bubbles (i.e., actively investing in the asset bubble). Günster proposes a new bubble detection method that does not require hindsight information and accounts for uncertainty. It identifies bubbles as a sudden acceleration of price growth beyond the growth in fundamental value. To measure the growth in fundamental value, she applies several asset pricing models commonly used in the Finance literature. Günster’s analysis is based on US industry portfolios since historical bubbles often started in industries, like e.g. the internet bubble. Günster finds that riding bubbles is optimal. An investor who rides bubbles can earn average abnormal returns of 4% to 8% annually. These high returns however do come at the expense of a higher risk. Günster evaluates this tradeoff for different types of investors and finds that it is overall optimal to actively invest in asset bubbles, or, ride the bubble.

More Information
Pictures of the Event
Full Text of the Dissertation