Share with your friends










Submit

Analytics Magazine

Innovation and speculation drive stock market bubble activity

Innovation and speculation drive stock market bubble activity

Source: ThinkStock

A group of data scientists conducted an in-depth analysis of major innovations and stock market bubbles from 1825 through 2000 and came away with novel takeaways of their own as they found some very distinctive patterns in the occurrence of bubbles over 175 years.

The study authors detected bubbles in approximately 73 percent of the innovations they studied, revealing the close relationship between innovation and stock market bubbles. Further, they found that the magnitude of the bubbles is tied to the awareness levels or visibility of each innovation. In other words, the more broadly known the innovation, the more likely the presence of a stock market bubble in the industry where the innovation is introduced.

But awareness and innovation aren’t the only drivers for the stock market bubbles. The higher the degree of “radicalness” for innovations, the more likely it is to bolster the clout of the specific innovation in the marketplace, otherwise known as an “indirect network effect.”

This enables companies to raise more equity capital during bubble periods as compared to non-bubble periods, and that new capital is tied to faster and stronger increased awareness of the innovation even after the bubble bursts. In the end, the authors found that the stocks of innovating companies outperform the market from the start to the end of the bubble, which suggests that the innovations add value to both the company and to the large economy, in spite of the presence of bubbles.

The study, “Two Centuries of Innovations and Stock Market Bubbles,” is published in the August edition of the INFORMS journal Marketing Science. The study authors include Alina and Sorin Sorescu of Mays Business School at Texas A&M University, Will Armstrong of the Rawls College of Business at Texas Tech University and Bart Devoldere from the Vlerick Business School in The Hague, The Netherlands.

“While some of our findings provide a retrospective look at stock market activity over 175 years, and prior to the continued innovations we’ve seen the past 18 years, one realization for us has been that traditional financial economics may not have viewed innovation with enough specificity,” says Sorescu.

“A good deal of literature in financial economics on stock market bubble activity tends to view innovation as something generated by an aggregate production function,” Sorescu says. “What it doesn’t do is approach innovation as a collection of products with distinct characteristics. Studies in this area rarely incorporate a formal statistical measurement of market bubbles. Instead they rely on hindsight analysis of stock price fluctuations with little attempt to link those movements to specific innovations.

“Our study is the first to look at the occurrence of bubbles in association with a large set of specific innovations introduced across two centuries, and to measure bubbles using statistical tests,” Sorescu adds. “We are also the first to show that firms can benefit from bubbles driven by innovation. This is in contrast to the conventional thinking that that bubbles are detrimental that have few, if any, positive effects.”

The full study is available at https://pubsonline.informs.org/stoken/default+domain/MKSC-PR-08-2018/full/10.1287/mksc.2018.1095



Headlines

Fighting terrorists online: Identifying extremists before they post content

New research has found a way to identify extremists, such as those associated with the terrorist group ISIS, by monitoring their social media accounts, and can identify them even before they post threatening content. The research, “Finding Extremists in Online Social Networks,” which was recently published in the INFORMS journal Operations Research, was conducted by Tauhid Zaman of the MIT, Lt. Col. Christopher E. Marks of the U.S. Army and Jytte Klausen of Brandeis University. Read more →

Syrian conflict yields model for attrition dynamics in multilateral war

Based on their study of the Syrian Civil War that’s been raging since 2011, three researchers created a predictive model for multilateral war called the Lanchester multiduel. Unless there is a player so strong it can guarantee a win regardless of what others do, the likely outcome of multilateral war is a gradual stalemate that culminates in the mutual annihilation of all players, according to the model. Read more →

SAS, Samford University team up to generate sports analytics talent

Sports teams try to squeeze out every last bit of talent to gain a competitive advantage on the field. That’s also true in college athletic departments and professional team offices, where entire departments devoted to analyzing data hunt for sports analytics experts that can give them an edge in a game, in the stands and beyond. To create this talent, analytics company SAS will collaborate with the Samford University Center for Sports Analytics to support teaching, learning and research in all areas where analytics affects sports, including fan engagement, sponsorship, player tracking, sports medicine, sports media and operations. Read more →

UPCOMING ANALYTICS EVENTS

INFORMS-SPONSORED EVENTS

INFORMS Annual Meeting
Nov. 4-7, 2018, Phoenix

Winter Simulation Conference
Dec. 9-12, 2018, Gothenburg, Sweden

OTHER EVENTS

Making Data Science Pay
Oct. 29 -30, 12 p.m.-5 p.m.


Applied AI & Machine Learning | Comprehensive
Starts Oct. 29, 2018 (live online)


The Analytics Clinic
Citizen Data Scientists | Why Not DIY AI?
Nov. 8, 2018, 11 a.m. – 12:30 p.m.


Advancing the Analytics-Driven Organization
Jan. 28–31, 2019, 1 p.m.– 5 p.m. (live online)


CAP® EXAM SCHEDULE

CAP® Exam computer-based testing sites are available in 700 locations worldwide. Take the exam close to home and on your schedule:


 
For more information, go to 
https://www.certifiedanalytics.org.