Crowell Second Prize for joint paper on investors' optimal response to asset price bubbles


How should investors respond to asset price bubbles? By riding them, argue <link people erik-kole _blank>Dr. Erik Kole, Assistant Professor in Financial Econometrics, and his co-authors Dr. Nadja Guenster of Maastricht University and Professor Ben Jacobsen of Massey University in their joint paper ‘Riding bubbles’. A dynamic strategy of riding bubbles, based upon real-time information, results in abnormal annual returns of 3 to 8 per cent.

‘Riding bubbles’ earned Kole and his colleagues the 2011 Crowell Second Prize from the quantitative research group of PanAgora Asset Management, in Boston, USA. Submitted papers were judged on their originality, quality of exposition, and analytical rigour. The paper itself, and a presentation of it by its first author Dr. Guenster, were judged to be “truly outstanding and deserving this recognition”. The authors received 3000 USD in award money.

Abstract of 'Riding bubbles'

Guenster, Kole, and Jacobsen empirically analyse rational investors’ optimal response to asset price bubbles. They define bubbles as a sudden acceleration of price growth beyond the growth in fundamental value given by an asset pricing model. Their new bubble detection method requires only a limited time-series of historical returns. The authors apply their method to US industries and find strong statistical and economic support for the riding bubbles hypothesis: when an investor detects a bubble, his or her optimal portfolio weight increases significantly. A dynamic riding bubble strategy that uses only real-time information earns abnormal annual returns of 3 to 8 per cent.

Download ‘Riding Bubbles’ at RePub (pdf)