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Explosive Behavior in the 1990s Nasdaq : When Did Exuberance Escalate Asset Values?

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  • Peter C.B. Philips

    (Singapore Management University)

  • Yangru Wu
  • Jun Yu

Abstract

A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date-stamping the origination and collapse of economic exuberance, and providing valid conOdence intervals for explosive growth rates. The method involves the recursive im- plementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides conOrmation of ex- plosiveness and date-stamps the origination of Onancial exuberance to mid -1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in Onancial market, thereby giving the remark empirical content.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23050.

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Date of creation: Jan 2009
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Handle: RePEc:eab:financ:23050

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Keywords: Explosive root; irrational exuberance; Mildly explosive process; Nasdaq bubble; periodically collapsing bubble; sup test; unit root test;

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