Abstract

We study when rapid asset price appreciation becomes unsustainable. Analyzing U.S. stock market data from 1926 to 2022, we document that rapid price increases in individual stocks systematically predict subsequent crashes and negative returns. When returns exceed 200% over a three-month period, stocks experience an average decline of 29% over two years, with a 55% probability of crashing by more than 50%. By systematically varying both return thresholds and formation periods across over one thousand parameter combinations, we demonstrate that the likelihood and magnitude of subsequent crashes are primarily determined by the speed of the price increase, measured as average daily cumulative excess return. This finding documents a robust relationship consistent with a “speed limit” in asset prices—if returns exceed the speed limit, subsequent two-year crash probability rises sharply. Notably, this pattern exhibits a striking asymmetry: rapid price declines show no systematic tendency to reverse over the subsequent two-year horizon, suggesting potentially different mechanisms drive price increases versus decreases. Our findings raise questions about weak-form efficiency at the individual stock level and introduce “speed limits” as a simple yet powerful predictor of unsustainable valuations and potential bubble-like episodes.

Notre Dame, Yale Behavioral Finance Reading Group