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An Examination of the Occurrence of Speculative Bubbles in the US Stock Markets

Author

Listed:
  • Pranvera Mulla
  • Ornela Shalari
  • Anita Gumeni

Abstract

The paper will investigate the possibility of the formation of a speculative bubble in the U.S. stock markets after the 2007-2008 crises. The work is initiated by the observation of historically high equity prices in the stock markets as pointed out by Professor Robert J. Shiller in his new edition of his book ‘Irrational Exuberance’. Until recently the development of a methodology which can be used to detect bubble in real time has been challenging and previous work has mainly focused on ex-post econometric tests in time series that contain only one bubble. The paper uses the recent methodology developed by Philips et. al. that fixes for these deficiencies and enable real time monitoring of statistically significant exuberance and multiple collapsing bubbles within a single time series. Both NASDAQ and S&P 500 indexes are considered and investigation regarding exuberance that cannot be explained by the market fundamentals is conducted.

Suggested Citation

  • Pranvera Mulla & Ornela Shalari & Anita Gumeni, 2018. "An Examination of the Occurrence of Speculative Bubbles in the US Stock Markets," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 21(67), pages 98-109, March.
    • Handle: RePEc:rej:journl:v:21:y:2018:i:67:p:98-109
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    References listed on IDEAS

    as
    1. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, February.
    2. Busetti, Fabio & Taylor, A. M. Robert, 2004. "Tests of stationarity against a change in persistence," Journal of Econometrics, Elsevier, vol. 123(1), pages 33-66, November.
    3. Olivier J. Blanchard & Mark W. Watson, 1982. "Bubbles, Rational Expectations and Financial Markets," NBER Working Papers 0945, National Bureau of Economic Research, Inc.
    4. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Historical Episodes Of Exuberance And Collapse In The S&P 500," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1043-1078, November.
    5. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    6. Kim, Jae-Young, 2000. "Detection of change in persistence of a linear time series," Journal of Econometrics, Elsevier, vol. 95(1), pages 97-116, March.
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    More about this item

    Keywords

    Differential Equations; Price exuberance; US stock markets; Real time monitoring;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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