Market Fundamentals versus Speculative Bubbles: A New Test Applied to the German Hyperinflation
AbstractWe develop and apply a method of testing for speculative bubbles. The method is designed to overcome two well-known problems in the identification of bubble phenomena--the problem of distinguishing any type of bubble from an expected future change in market fundamentals and the problem of detecting a periodically-collapsing bubble when the residuals of the fundamentals regression are integrated. We propose the strategy of estimating a switching regime model of market prices, partialling out expected changes in fundamentals and carefully analysing the properties of the residuals. Extending our analysis, we also propose a more direct test for bubbles, based on the estimation of the general (fundamentals-plus-bubble) solution for market prices. We apply our methodology to the study of German hyperinflation in the 1920s. We find evidence consistent with the existence of a bubble during that hyperinflation. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.
Volume (Year): 1 (1996)
Issue (Month): 4 (October)
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Web page: http://www.interscience.wiley.com/jpages/1076-9307/
Other versions of this item:
- Blackburn, K. & Sola, M., 1992. "Market fundamentals versus speculative bubbles. A new test applied to the German hyperinflation," Discussion Paper Series In Economics And Econometrics 9208, Economics Division, School of Social Sciences, University of Southampton.
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- Jirasakuldech, Benjamas & Emekter, Riza & Rao, Ramesh P., 2008. "Do Thai stock prices deviate from fundamental values?," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 298-315, June.
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- Hooker, Mark A., 2000. "Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 583-600, August.
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