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Steady-State Distributions for Models of Bubbles: their Existence and Econometric Implications

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  • John Knight

    (University of Western Ontario)

  • Stephen Satchell

    (Department of Economics, Mathematics & Statistics, Birkbeck
    University of Sydney)

  • Nandini Srivastava

    (Christ's College, University of Cambridge)

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    Abstract

    The purpose of this paper is to examine the properties of bubbles in the light of steady state results for threshold auto-regressive (TAR) models recently derived by Knight and Satchell (2011). We assert that this will have implications for econometrics. We study the conditions under which we can obtain a steady state distribution of asset prices using our simple model of bubbles based on our particular definition of a bubble. We derive general results and further extend the analysis by considering the steady state distribution in three cases of a (I) a normally distributed error process, (II) a non normally (exponentially) distributed steady-state process and (III) a switching random walk with a fairly general i.i.d error process We then examine the issues related to unit root testing for the presence of bubbles using standard econometric procedures. We illustrate as an example, the market for art, which shows distinctly bubble-like characteristics. Our results shed light on the ubiquitous finding of no bubbles in the econometric literature.

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    File URL: http://www.bbk.ac.uk/ems/research/wp/2012/PDFs/BWPEF1208.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 1208.

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    Date of creation: Apr 2012
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    Handle: RePEc:bbk:bbkefp:1208

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    Related research

    Keywords: Bubbles; Asset prices; Steady state; Non-linear time series; TAR Models;

    This paper has been announced in the following NEP Reports:

    References

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    21. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr.
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