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Testing for Co‐explosive Behaviour in Financial Time Series

Author

Listed:
  • Andria C. Evripidou
  • David I. Harvey
  • Stephen J. Leybourne
  • Robert Sollis

Abstract

This article proposes a test to determine if two price series that each contain an explosive autoregressive regime consistent with the presence of a bubble are related in the sense that a linear combination of them is integrated of order zero. We refer to such a phenomenon as ‘co‐explosive behaviour’, and propose a test based on a stationarity testing framework. The test allows the explosive episode in one series to lead (or lag) that in the other by a number of time periods. We establish the asymptotic properties of the test statistic and propose a wild bootstrap procedure for obtaining critical values that are robust to heteroskedasticity. Simulations show that the proposed test has good finite sample size and power performance. An empirical application to detect whether co‐explosive behaviour exists among a set of precious and non‐ferrous metals is presented.

Suggested Citation

  • Andria C. Evripidou & David I. Harvey & Stephen J. Leybourne & Robert Sollis, 2022. "Testing for Co‐explosive Behaviour in Financial Time Series," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 624-650, June.
    • Handle: RePEc:bla:obuest:v:84:y:2022:i:3:p:624-650
    DOI: 10.1111/obes.12487
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