Testing for periodically collapsing rational speculative bubbles in US REITs
AbstractThis paper is the first to utilize a direct test for periodic, partially collapsing speculative bubbles in US REIT prices. A long history of data is employed for the All, Mortgage and Equity REIT categories. This approach is more powerful than existing tests and is based on the formulation of a switching model that has a surviving regime where the bubble continues to grow and a collapsing regime where the bubble implodes. There is some evidence for the presence of speculative bubbles, most notably in the Mortgage REITs series. There is also visual evidence of a negative bubble in all three series in the early 1970s and of a positive bubble after 2000 which subsequently burst. We are able to compute the time-varying probabilities of being in the surviving and collapsing regimes, and through this to estimate a probability that the bubble will burst during the following period. We show how this information may be used in developing a signal to inform investors' decisions on timing an exit from the market, thereby shielding their portfolios from the effects of periodically bursting bubbles or indeed taking advantage of such bubbles.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2009-11.
Length: 22 pages
Date of creation: Sep 2009
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REITs; periodic partially collapsing speculative bubbles; direct bubble tests; probability of collapse; trading signals;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
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