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An empirical investigation of asset price bubbles in Latin American emerging financial markets

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Author Info
L. Sarno
M. P. Taylor

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Abstract

A generally accepted view among researchers and policy makers is that large capital flows to Latin America starting from the second half of the 1980s through the 1990s may have caused speculative bubbles in the asset markets of recipient economies. This article tests for asset price bubbles in the stock markets of six Latin American countries using data for the last 10 years or so. It employs recently developed robust estimation techniques which are specifically designed to exploit the skewness and leptokurtosis that bubbles may engender in the data. It finds massive deviations from normality in both stock prices and dividends series and the test results provide strong evidence for the existence of stock price bubbles in each of the markets examined.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 13 (2003)
Issue (Month): 9 (September)
Pages: 635-643
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Handle: RePEc:taf:apfiec:v:13:y:2003:i:9:p:635-643

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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.:
  1. Im, K.S., 1996. "Least Square Approach to Non-Normal Disturbances," Cambridge Working Papers in Economics 9603, Faculty of Economics, University of Cambridge.
  2. Sarno, Lucio & Taylor, Mark P, 1999. "The Persistence of Capital Inflows and the Behaviour of Stock Prices in East Asia Emerging Markets: Some Empirical Evidence," CEPR Discussion Papers 2150, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Timothy D. Lane & José Saúl Lizondo & Donald J. Mathieson & Morris Goldstein & Liliana Rojas-Suárez & D. F. I. Folkerts-Landau, 1991. "Determinants and Systemic Consequences of International Capital Flows," IMF Occasional Papers 77, International Monetary Fund.
  4. Taylor, Mark P & Sarno, Lucio, 1997. "Capital Flows to Developing Countries: Long- and Short-Term Determinants," World Bank Economic Review, Oxford University Press, vol. 11(3), pages 451-70, September.
  5. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April. [Downloadable!] (restricted)
  6. Razin, Assaf & Sadka, Efraim & Yuen, Chi-Wa, 1998. "A pecking order of capital inflows and international tax principles," Journal of International Economics, Elsevier, vol. 44(1), pages 45-68, February. [Downloadable!] (restricted)
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  7. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October. [Downloadable!]
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  8. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  9. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September. [Downloadable!] (restricted)
  10. Wooldridge, Jeffrey M., 1993. "Efficient Estimation with Orthogonal Regressors," Econometric Theory, Cambridge University Press, vol. 9(04), pages 687-687, August. [Downloadable!]
  11. Jeffrey A. Frankel and Chudozie Okongwu., 1995. "Liberalized Portfolio Capital Inflows in Emerging Markets: Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence," Center for International and Development Economics Research (CIDER) Working Papers C95-054, University of California at Berkeley.
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  12. Fernandez-Arias, Eduardo & Montiel, Peter J, 1996. "The Surge in Capital Inflows to Developing Countries: An Analytical Overview," World Bank Economic Review, Oxford University Press, vol. 10(1), pages 51-77, January.
  13. repec:cup:etheor:v:11:y:1995:i:5:p:1148-71 is not listed on IDEAS
  14. Corbo, Vittorio & Hernandez, Leonardo, 1996. "Macroeconomic Adjustment to Capital Inflows: Lessons from Recent Latin American and East Asian Experience," World Bank Research Observer, Oxford University Press, vol. 11(1), pages 61-85, February.
  15. Olivier J. Blanchard & Mark W. Watson, 1983. "Bubbles, Rational Expectations and Financial Markets," NBER Working Papers 0945, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  17. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
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  18. Taylor, Mark P. & Peel, David A., 1998. "Periodically collapsing stock price bubbles: a robust test," Economics Letters, Elsevier, vol. 61(2), pages 221-228, November. [Downloadable!] (restricted)
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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. Yu, Tongkui & Li, Honggang, 2008. "Dynamic Regimes of a Multi-agent Stock Market Model," MPRA Paper 14339, University Library of Munich, Germany. [Downloadable!]
  2. James E. Payne & George A. Waters, 2005. "REIT markets: periodically collapsing negative bubbles?," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(2), pages 65-69, March. [Downloadable!] (restricted)
  3. Robert Sollis, 2006. "Testing for bubbles: an application of tests for change in persistence," Applied Financial Economics, Taylor and Francis Journals, vol. 16(6), pages 491-498, March. [Downloadable!] (restricted)
  4. James Payne & George Waters, 2007. "Have Equity REITs Experienced Periodically Collapsing Bubbles?," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 207-224, February. [Downloadable!] (restricted)
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