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Fads or bubbles?

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Author Info
Simon van Norden (Service de l'enseignment de la finance, Ecole des H.E.C., 3000 Chemin de la Côte Sainte Catherine, Montreal, QC, Canada H3T 2A7)
Huntley Schaller () (Department of Economics, Carleton University, 1125 Colonel By Drive, Ottawa, Ontario, K1S 5B6, CANADA)

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Abstract

This paper tests between fads and bubbles using a switching regression to distinguish between competing models. Two main features of the bubbles model distinguish it from the fads model. First, the bubbles model implies that returns are drawn from regimes which differ in the way returns vary with deviations from fundamental prices. Second, the bubbles model implies that deviations from fundamental price will help predict regime switches. Using US data for 1926-89, we find evidence which is consistent with the fads model even when we allow for variation in expected dividend growth rates and expected discount rates. However, the restrictions which the fads model implies for a more general switching-regression specification are rejected. The rejections point in the direction of the bubbles model, although not all of the implications of the bubbles model are supported by the data.

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Publisher Info
Article provided by Springer in its journal Empirical Economics.

Volume (Year): 27 (2002)
Issue (Month): 2 ()
Pages: 335-362
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Handle: RePEc:spr:empeco:v:27:y:2002:i:2:p:335-362

Note: Received: October 2000/Final Version Received: October 2001
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Related research
Keywords: macroeconomics and financial markets; fads; bubbles; time series econometrics; regime switching;

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Find related papers by JEL classification:
G1 - Financial Economics - - General Financial Markets
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Manzan, S., 2003. "Nonlinear Mean Reversion in Stock Prices," CeNDEF Working Papers 03-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  2. Thérèse Laflèche, 1997. "Mesures du taux d'inflation tendanciel," Working Papers 97-9, Bank of Canada. [Downloadable!]
  3. Maurice J. Roche, 1999. "Irish house prices: will the roof fall in?," Economics, Finance and Accounting Department Working Paper Series n890699, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
  4. Maurice J. Roche, 1999. "Irish House Prices - Will the Roof Cave In?," The Economic and Social Review, Economic and Social Studies, vol. 30(4), pages 343-362. [Downloadable!]
  5. Maurice J. Roche, 1999. "The rise in Dublin city house prices: bubble, fad or just fundamentals," Economics, Finance and Accounting Department Working Paper Series n920799, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
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