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Avoiding the Pitfalls: Can Regime-Switching Tests Detect Bubbles?

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Author Info

  • Vigfusson, R.
  • Van Norden, S.

Abstract

Our paper reports on Monte Carlo experiments using Evans's data-generating process to gauge the performance of these two kinds of regime-switching tests.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 96-11.

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Length: 25 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:bca:bocawp:96-11

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Keywords: UNIT ROOTS; COINTEGRATION;

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References

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  1. van Norden, Simon, 1996. "Regime Switching as a Test for Exchange Rate Bubbles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 219-51, May-June.
  2. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-214, December.
  3. Weil, Philippe, 1990. "On the Possibility of Price Decreasing Bubbles," Econometrica, Econometric Society, vol. 58(6), pages 1467-74, November.
  4. Franklin Allen & Gary B. Gorton, . "Rational Finite Bubbles," Rodney L. White Center for Financial Research Working Papers 41-88, Wharton School Rodney L. White Center for Financial Research.
  5. Kenneth D. West, 1986. "A Specification Test for Speculative Bubbles," NBER Working Papers 2067, National Bureau of Economic Research, Inc.
  6. Simon van Norden & Huntley Schaller & ), 1995. "Speculative Behaviour, Regime-Switching, and Stock Market Crashes," Econometrics 9502003, EconWPA.
  7. Maurice Obstfeld & Kenneth Rogoff, 1981. "Speculative hyperinflations in a maximizing models: can we rule them out?," International Finance Discussion Papers 195, Board of Governors of the Federal Reserve System (U.S.).
  8. Van Norden, S. & Vigfusson, R., 1996. "Regime-Switching Models, A guide to the Bank of Canada Gauss Procedures," Working Papers 96-3, Bank of Canada.
  9. M. Funke & S. Hall & M. Solá, 1993. "Rational bubbles during Polland’s hiperinflation: implications and empirical evidence," Documentos de Trabajo (working papers) 1193, Department of Economics - dECON.
  10. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  11. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May.
  12. Bulow, Jeremy & Klemperer, Paul, 1994. "Rational Frenzies and Crashes," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 1-23, February.
  13. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  14. repec:fth:calaec:13-89 is not listed on IDEAS
  15. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  16. Charemza, Wojciech W. & Deadman, Derek F., 1995. "Speculative bubbles with stochastic explosive roots: The failure of unit root testing," Journal of Empirical Finance, Elsevier, vol. 2(2), pages 153-163, June.
  17. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August.
  18. van Norden, Simon & Schaller, Huntley, 1993. "The Predictability of Stock Market Regime: Evidence from the Toronto Stock Exchange," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 505-10, August.
  19. 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.
  20. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
  21. Bhargava, Alok, 1986. "On the Theory of Testing for Unit Roots in Observed Time Series," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 369-84, July.
  22. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
  23. C. Gilles & S.F. Leroy, 1989. "Bublles and Charges," Carleton Economic Papers 89-05, Carleton University, Department of Economics, revised May 1992.
    • Gilles, Christian & LeRoy, Stephen F, 1992. "Bubbles and Charges," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 323-39, May.
  24. 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.
  25. Francis X. Diebold & Joon-Haeng Lee & Gretchen C. Weinbach, 1993. "Regime switching with time-varying transition probabilities," Working Papers 93-12, Federal Reserve Bank of Philadelphia.
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Citations

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Cited by:
  1. Al-Anaswah, Nael & Wilfling, Bernd, 2011. "Identification of speculative bubbles using state-space models with Markov-switching," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1073-1086, May.
  2. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs E:47/2012, Bank of Finland.
  3. 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.
  4. Kim, Bong Han & Min, Hong-Ghi, 2011. "Household lending, interest rates and housing price bubbles in Korea: Regime switching model and Kalman filter approach," Economic Modelling, Elsevier, vol. 28(3), pages 1415-1423, May.
  5. Maurice J. Roche & Kieran McQuinn, 2000. "Speculation in agricultural land," Economics, Finance and Accounting Department Working Paper Series n1010700, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  6. Mc Quinn, Kieran, 2004. "A Model of the Irish Housing Sector," Research Technical Papers 1/RT/04, Central Bank of Ireland.
  7. Roche, Maurice J., 2001. "The rise in house prices in Dublin: bubble, fad or just fundamentals," Economic Modelling, Elsevier, vol. 18(2), pages 281-295, April.

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