Testing for rational bubbles in a co-explosive vector autoregression
AbstractWe derive the parameter restrictions that a standard equity market model implies for a bivariate vector autoregression for stock prices and dividends, and we show how to test these restrictions using likelihood ratio tests. The restrictions, which imply that stock returns are unpredictable, are derived both for a model without bubbles and for a model with a rational bubble. In both cases we show how the restrictions can be tested through standard chi-squared inference. The analysis for the no-bubble case is done within the traditional Johansen model for I(1) variables, while the bubble model is analysed using a co-explosive framework. The methodology is illustrated using US stock prices and dividends for the period 1872-2000.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2010-25.
Date of creation: 25 Jun 2010
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Web page: http://www.econ.au.dk/afn/
Rational bubbles; Explosiveness and co-explosiveness; Cointegration; Vector autoregression; Likelihood ratio tests;
Other versions of this item:
- Tom Engsted & Bent Nielsen, 2012. "Testing for rational bubbles in a coexplosive vector autoregression," Econometrics Journal, Royal Economic Society, vol. 15(2), pages 226-254, 06.
- Bent Nielsen & Tom Engsted, 2010. "Testing for rational bubbles in a co-explosive vector autoregression," Economics Series Working Papers 2010-W06, University of Oxford, Department of Economics.
- Tom Engsted & Bent Nielsen, 2010. "Testing for rational bubbles in a co-explosive vector autoregression," Economics Papers 2010-W06, Economics Group, Nuffield College, University of Oxford.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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- Bent Nielsen & Anders Rahbek, 2003. "Similarity Issues in Cointegration Models," Economics Series Working Papers 1998-W13, University of Oxford, Department of Economics.
- Kivedal, Bjørnar Karlsen, 2013. "Testing for rational bubbles in the US housing market," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 369-381.
- Xiaohu Wang & Jun Yu, 2013. "Limit Theory for an Explosive Autoregressive Process," Working Papers 08-2013, Singapore Management University, School of Economics.
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