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Identification of speculative bubbles using state-space models with Markov-switching

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  • Nael Al-Anaswah
  • Bernd Wilfling

Abstract

In this paper we use a state-space model with Markov-switching to detect speculative bubbles in stock-price data. Our two innovations are (1) to adapt this technology to the state-space representation of a well-known present-value stock-price model, and (2) to estimate the model via Kalman-filtering using a plethora of artificial as well as real-world data sets that are known to contain bubble periods. Analyzing the smoothed regime probabilities, we find that our technology is well suited to detecting stock-price bubbles in both types of data sets.

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File URL: http://www1.wiwi.uni-muenster.de/cqe/forschung/publikationen/cqe-working-papers/CQE_WP_3_2009.pdf
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Bibliographic Info

Paper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 0309.

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Length: 35 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:cqe:wpaper:0309

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Keywords: Stock market dynamics; Detection of speculative bubbles; Present value models; State-space models with Markov-switching;

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Citations

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Cited by:
  1. Asako, Kazumi & Liu, Zhentao, 2013. "A statistical model of speculative bubbles, with applications to the stock markets of the United States, Japan, and China," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(7), pages 2639-2651.
  2. Rotermann, Benedikt & Wilfling, Bernd, 2014. "Periodically collapsing Evans bubbles and stock-price volatility," Economics Letters, Elsevier, Elsevier, vol. 123(3), pages 383-386.
  3. Chen, Wenjuan & Bettendorf, Timo, 2013. "Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80002, Verein für Socialpolitik / German Economic Association.
  4. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis : a multivariate Markov-Switching analysis," Economics Papers from University Paris Dauphine 123456789/8773, Paris Dauphine University.
  5. Szafarz, Ariane, 2012. "Financial crises in efficient markets: How fundamentalists fuel volatility," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(1), pages 105-111.
  6. Timo Bettendorf & Wenjuan Chen, 2013. "Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests," SFB 649 Discussion Papers SFB649DP2013-012, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. Chan, Kam Fong & Treepongkaruna, Sirimon & Brooks, Robert & Gray, Stephen, 2011. "Asset market linkages: Evidence from financial, commodity and real estate assets," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(6), pages 1415-1426, June.
  8. repec:hal:journl:halshs-00658540 is not listed on IDEAS
  9. Mathieu Gatumel & Florian Ielpo, 2011. "The Number of Regimes Across Asset Returns: Identification and Economic Value," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00658540, HAL.

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