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A New Test for Speculative Bubbles Based on Return Variance Decompositions

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Author Info
Engsted, Tom () (Department of Finance, Aarhus School of Business)
Tanggaard, Carsten () (Department of Finance, Aarhus School of Business)

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Abstract

We suggest a new test for speculative stock market bubbles that has several advantages compared to earlier bubble tests. The test makes use of the fact that the variance of excess return innovations and the variance of (dividend news minus interest rate news minus excess returm news) will be equal if there is no bubble, and differ if there is a bubble. A VAR-model is used to estimate the variance decomposition, and the test is computed using bootstrap simulation. On US and UK data over the period 1919-1999, the test does not reject the no-buble hypothesis.

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Publisher Info
Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 01-9.

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Length: 13 pages
Date of creation: 21 Sep 2001
Date of revision:
Handle: RePEc:hhb:aarfin:2001_009

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Related research
Keywords: Speculative bubbles; Return variance decomposition; Vector-autoregression; Bootstrap simulation; US and UK stoch markets;

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This page was last updated on 2009-11-25.

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