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Testing for Multiple Bubbles

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Author Info

  • Peter C. B. Phillips

    ()
    (Yale University, University of Auckland, University of Southampton & Singapore Management University)

  • Shu-Ping Shi

    ()
    (Research School of Economics, The Australian National University)

  • Jun Yu

    ()
    (Sim Kee Boon Institute for Financial Economics, School of Economics and Lee Kong Chian School of Business)

Abstract

Identifying and dating explosive bubbles when there is periodically collapsing behavior over time has been a major concern in the economics literature and is of great importance for practitioners. The complexity of the nonlinear structure inherent in multiple bubble phenomena within the same sample period makes econometric analysis particularly difficult. The present paper develops new recursive procedures for practical implementation and surveillance strategies that may be employed by central banks and fiscal regulators. We show how the testing procedure and dating algorithm of Phillips, Wu and Yu (2011, PWY) are affected by multiple bubbles and may fail to be consistent. The present paper proposes a generalized version of the sup ADF test of PWY to address this difficulty, derives its asymptotic distribution, introduces a new date-stamping strategy for the origination and termination of multiple bubbles, and proves consistency of this dating procedure. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. Empirical applications are conducted to S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach identifies many key historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and the CUSUM procedure locate far fewer episodes in the same sample range.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 13-2012.

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Length: 67 pages
Date of creation: Jan 2012
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:13-2012

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Related research

Keywords: Date-stamping strategy; Generalized sup ADF test; Multiple bubbles; Rational bubble; Periodically collapsing bubbles; Sup ADF test;

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References

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  1. Peter C.B. Philips & Yangru Wu & Jun Yu, 2009. "Explosive Behavior in the 1990s Nasdaq : When Did Exuberance Escalate Asset Values?," Finance Working Papers 23050, East Asian Bureau of Economic Research.
  2. Ulrich Homm & Jörg Breitung, 2010. "Testing for Speculative Bubbles in Stock Markets: A Comparison of Alternative Methods," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(1), pages 198-231, 2012 10 1.
  3. Peter C.B. Phillips & Tassos Magdalinos, 2004. "Limit Theory for Moderate Deviations from a Unit Root," Cowles Foundation Discussion Papers 1471, Cowles Foundation for Research in Economics, Yale University.
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  7. Peter C. B. Phillips & Jun Yu, 2009. "Dating the Timeline of Financial Bubbles During the Subprime Crisis," Finance Working Papers 23051, East Asian Bureau of Economic Research.
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Citations

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Cited by:
  1. Arora, Vipin & Gomis-Porqueras, Pedro & Shi, Shuping, 2013. "The divergence between core and headline inflation: Implications for consumers’ inflation expectations," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 497-504.
  2. Peter C. B. Phillips & Shu-Ping Shi & Jun Yu, 2011. "Specification Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior," Working Papers 15-2011, Singapore Management University, School of Economics.
  3. Timo Bettendorf & Wenjuan Chen, 2013. "Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests," SFB 649 Discussion Papers SFB649DP2013-012, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Chen, Wenjuan & Bettendorf, Timo, 2013. "Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80002, Verein für Socialpolitik / German Economic Association.
  5. Matthew S. Yiu & Jun Yu & Lu Jin, 2012. "Detecting Bubbles in Hong Kong Residential Property Market," Working Papers CoFie-03-2012, Sim Kee Boon Institute for Financial Economics.
  6. Yoon, Gawon, 2012. "Explosive U.S. budget deficit," Economic Modelling, Elsevier, vol. 29(4), pages 1076-1080.
  7. Gustavo Adolfo HERNANDEZ DIAZ & Gabriel PIRAQUIVE GALEANO, 2014. "Evolución de los precios de la vivienda en Colombia," ARCHIVOS DE ECONOMÍA 011208, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  8. Taipalus , Katja, 2012. "Signaling asset price bubbles with time-series methods," Research Discussion Papers 7/2012, Bank of Finland.
  9. Anton Skrobotov, 2013. "Double Unit Roots Testing, GLS-detrending and Uncertainty over the Initial Conditions," Working Papers 0083, Gaidar Institute for Economic Policy, revised 2013.
  10. Etienne, Xiaoli L. & Irwin, Scott H. & Garcia, Philip, 2014. "Bubbles in food commodity markets: Four decades of evidence," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 129-155.
  11. Taipalus, Katja, 2012. "Detecting asset price bubbles with time-series methods," Scientific Monographs E:47/2012, Bank of Finland.
  12. Bohl, Martin T. & Kaufmann, Philipp & Stephan, Patrick M., 2013. "From hero to zero: Evidence of performance reversal and speculative bubbles in German renewable energy stocks," Energy Economics, Elsevier, vol. 37(C), pages 40-51.

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