Measuring Market Froth
By Rajeev Bhargava, Michael Guidi, Robin Greenwood, Zachary Crowell
Nov 7, 2022

We define equity markets and sectors to be “frothy” when the probability of a future drawdown in prices is high. Using simple panel regressions, we analyze data across 80 countries and 400 country-sectors to identify and evaluate which factors--including issuance, volatility, the price path, and flow-based factors-- are most predictive of future sector-level drawdowns. We translate our predictive model into indicators for sector- and market-level froth.

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