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Bubbles in the Finnish and US equities markets

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  • Taipalus, Katja

    ()
    (Bank of Finland Research)

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    Abstract

    Tests for unit roots in log dividend yields, which are consistent with ‘rational bubbles’ in stock prices, are conducted for the S&P500 and Finnish stock market indexes. In addition to the traditional unit root tests, we split the data into 10-year segments and use frequency domain analysis to test for the presence of unit roots in the dividend yield data. The results strongly suggest the existence of bubbles in both the US and Finnish markets. Finally we develop a novel dividend yield-based method to track periods when stock prices divert their fundamental levels. This indicator produces promising results, as it seems to have some forecasting ability concerning booms and busts in the stock markets.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/erillisjulkaisut/Documents/E35.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Scientific Monographs with number E:35/2006.

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    Length: 128 pages
    Date of creation: 29 Aug 2006
    Date of revision:
    Handle: RePEc:hhs:bofism:2006_035

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: equity price; bubble; rolling ADF;

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    Cited by:
    1. Taipalus , Katja, 2012. "Signaling asset price bubbles with time-series methods," Research Discussion Papers 7/2012, Bank of Finland.
    2. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs E:47/2012, Bank of Finland.
    3. Nyberg, Peter & Vaihekoski, Mika, 2014. "Descriptive analysis of the Finnish stock market: Part II," Research Discussion Papers 10/2014, Bank of Finland.

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