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Periodically collapsing Evans bubbles and stock-price volatility

Author

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  • Benedikt Rotermann
  • Bernd Wilfling

Abstract

This paper analyzes conditional stock-price volatility within in present-value framework including (rational) periodically collapsing bubbles as introduced by Evans (1991). To this end, we derive an analytically closed-form volatility formula of the stock price. The formula establishes a direct link between the bubble component and stock-price volatility. Using a Bayesian Monte-Carlo estimation technique (the particle filter), we demonstrate how to fit the parametric volatility equation to stock-market data.

Suggested Citation

  • Benedikt Rotermann & Bernd Wilfling, 2013. "Periodically collapsing Evans bubbles and stock-price volatility," CQE Working Papers 2813, Center for Quantitative Economics (CQE), University of Muenster.
    • Handle: RePEc:cqe:wpaper:2813
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    References listed on IDEAS

    as
    1. Flood, Robert P & Hodrick, Robert J, 1986. "Asset Price Volatility, Bubbles, and Process Switching," Journal of Finance, American Finance Association, vol. 41(4), pages 831-842, September.
    2. Charles P. Kindleberger & Robert Z. Aliber, 2005. "Manias, Panics and Crashes," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-0-230-62804-5.
    3. Olivier J. Blanchard & Mark W. Watson, 1982. "Bubbles, Rational Expectations and Financial Markets," NBER Working Papers 0945, National Bureau of Economic Research, Inc.
    4. 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.
    5. Drew Creal, 2012. "A Survey of Sequential Monte Carlo Methods for Economics and Finance," Econometric Reviews, Taylor & Francis Journals, vol. 31(3), pages 245-296.
    6. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-930, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Verena Monschang & Bernd Wilfling, 2021. "Sup-ADF-style bubble-detection methods under test," Empirical Economics, Springer, vol. 61(1), pages 145-172, July.
    2. de Truchis, Gilles & Keddad, Benjamin, 2016. "On the risk comovements between the crude oil market and U.S. dollar exchange rates," Economic Modelling, Elsevier, vol. 52(PA), pages 206-215.
    3. Benedikt Rotermann & Bernd Wilfling, 2018. "A new stock-price bubble with stochastically deflating trajectories," Applied Economics Letters, Taylor & Francis Journals, vol. 25(15), pages 1091-1096, September.
    4. Ripamonti, Alexandre & Silva, Diego & Moreira Neto, Eurico, 2018. "Asset Pricing and Asymmetric Information," MPRA Paper 87403, University Library of Munich, Germany.
    5. Rangan Gupta & Jacobus Nel & Joshua Nielsen & Christian Pierdzioch, 2023. "Stock Market Volatility and Multi-Scale Positive and Negative Bubbles," Working Papers 202310, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Present value model; Evans bubbles; conditional volatility; particle filter estimation;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets

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