Detecting and Forecasting Large Deviations and Bubbles in a Near-Explosive Random Coefficient Model
AbstractThis paper proposes a Near Explosive Random-Coefficient autoregressive model for asset pricing which accommodates both the fundamental asset value and the recurrent presence of autonomous deviations or bubbles. Such a process can be stationary with or without fat tails, unit-root nonstationary or exhibit temporary exponential growth. We develop the asymptotic theory to analyze ordinary least-squares (OLS) estimation. One important theoretical observation is that the estimator distribution in the random coefficient model is qualitatively different from its distribution in the equivalent fixed coefficient model. We conduct recursive and full-sample inference by inverting the asymptotic distribution of the OLS test statistic, a common procedure in the presence of localizing parameters. This methodology allows to detect the presence of bubbles and establish probability statements on their apparition and devolution. We apply our methods to the study of the dynamics of the Case-Shiller index of U.S. house prices. Focusing in particular on the change in the price level, we provide an early detection device for turning points of booms and bust of the housing market.
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Bibliographic InfoPaper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number WP1314.
Length: 46 pages
Date of creation: Sep 2013
Date of revision:
Bubbles; Random Coefficient Autoregressive Model; Local Asymptotics; Asset Prices;
Other versions of this item:
- Anurag Narayan Banerjee & Guillaume Chevillon & Marie Kratz, 2013. "Detecting and Forecasting Large Deviations and Bubbles in a Near-Explosive Random Coefficient Model," Post-Print hal-00870795, HAL.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-18 (All new papers)
- NEP-ECM-2013-10-18 (Econometrics)
- NEP-ETS-2013-10-18 (Econometric Time Series)
- NEP-FOR-2013-10-18 (Forecasting)
- NEP-URE-2013-10-18 (Urban & Real Estate Economics)
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