Identifying stock market bubbles and evaluation with momentum index and CCI

Abstract

Stock markets ought to be efficient while stock prices reflect all available information fairly and equitably. This bubble majorly forms when market participants inflate stock prices above the stock value based on some valuation system. Identifying the formation of these bubbles becomes imperative to provide information for the investors and these bubbles need to be validated as well, hence this paper contemplates to identify the existence of stock market bubbles between 2017 and 2022 with respect to the BSE Sensex. It also aims to analyse, if the momentum index and consumer confidence index reflect the market bubbles along with performance when the bubbles crashed. The E-views platform for the data analysis and Dickey-fuller, Augmented Dickey-Fuller, Rolling ADF, and Supremum ADF tests were deployed for identification of bubbles. It is found that a major market bubble occurred between January-May 2020. Apart from identifying the bubble that occurred previously, this paper also intends to alert investors of future bubbles following the same pattern of indices. By analysing contributing factors leading to a bubble, investors can be better prepared for the next bubble and can adjust their strategies accordingly to minimize losses. Identification of stock market bubbles and validating them with momentum and consumer confidence indices just doesn’t suffice the investor requirements. Further the factors leading to the formation of these bubbles, nature of these bubbles also attention. Bubbles happen for commodity prices, crypto-currencies and often might be of different types and might reflect entirely different behaviour, in that case how far can momentum and CC indices serve as leading indicators need to be explored as well.