Sector Trading and Bubble Riding Behavior : Construction and Evaluation of Trading Strategy Based on Bubble Test

In this paper, we investigate the profitability of "riding the bubble" trading strategies in the Chinese stock market. Using sector-level data from the CSI 300, we identify bubble episodes using the bubble test proposed by Phillips et al. (2015). We then buy the sector-level indices whenever bubbles are identified, and buy the market index otherwise. Empirical studies show that most riding strategies outperform the market in terms of annualized return and Sharpe ratio. In particular, the optimal "riding bubble" trading strategy can generate an average annualized return of 13.41% over the period 2006-2020, while the buy-and-hold strategy yields 11.87%