This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Speculative Behaviour, Regime-Switching, and Stock Market Crashes

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Simon van Norden (Bank of Canada)
Huntley Schaller (Carleton University)
)

Additional information is available for the following registered author(s):

Abstract

This paper explores two very different models which might account for stock market crashes. A key innovative feature of our paper is that we use the models to show how their implications for stock market crashes may be tested using switching-regression econometrics. We are careful to show that our switching regressions reveal new patterns in the data which go well beyond known stylized facts (such as time-varying volatility, the leverage effect, and mean reversion.) We refer to the first model, which is based on historical accounts of "manias and panics," as a model of speculative behaviour; its key features are that "overvaluation" increases the probability and expected size of a stock market crash. We refer to the second model, in which there are regime switches in epxected dividend growth rates, as a model of switching fundamentals. Our results suggest that both speculative behaviour and news about fundamentals may be needed to explain stock market crashes.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://129.3.20.41/eps/em/papers/9502/9502003.ps.gz
File Format: application/postscript
File Function:
Download Restriction: no
File URL: http://129.3.20.41/eps/em/papers/9502/9502003.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by EconWPA in its series Econometrics with number 9502003.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length: 45 pages
Date of creation: 07 Feb 1995
Date of revision:
Handle: RePEc:wpa:wuwpem:9502003

Note: 45 pages of text & 8 pages graphs. Text and Graphs in separate Postscript files. Both files compressed in a single Info-zip archive, then uuencoded.
Contact details of provider:
Web page: http://129.3.20.41

For technical questions regarding this item, or to correct its listing, contact: (EconWPA).

Related research
Keywords:

Other versions of this item:

Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Funke, Michael & Hall, Stephen & Sola, Martin, 1994. "Rational bubbles during Poland's hyperinflation: Implications and empirical evidence," European Economic Review, Elsevier, vol. 38(6), pages 1257-1276, June. [Downloadable!] (restricted)
    Other versions:
  2. Kim, Myung Jig & Nelson, Charles R & Startz, Richard, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 515-28, May. [Downloadable!] (restricted)
    Other versions:
  3. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1990. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September. [Downloadable!] (restricted)
  5. Evans, Martin D D & Lewis, Karen K, 1995. "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 709-42. [Downloadable!] (restricted)
    Other versions:
  6. van Norden, Simon, 1996. "Regime Switching as a Test for Exchange Rate Bubbles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 219-51, May-June. [Downloadable!] (restricted)
    Other versions:
  7. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October. [Downloadable!] (restricted)
  8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  9. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185. [Downloadable!] (restricted)
  10. Gennotte, Gerard & Leland, Hayne, 1990. "Market Liquidity, Hedging, and Crashes," American Economic Review, American Economic Association, vol. 80(5), pages 999-1021, December. [Downloadable!] (restricted)
    Other versions:
  11. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August. [Downloadable!] (restricted)
    Other versions:
  12. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  13. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December. [Downloadable!] (restricted)
  14. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September. [Downloadable!] (restricted)
  15. van Norden, Simon & Schaller, Huntley, 1993. "The Predictability of Stock Market Regime: Evidence from the Toronto Stock Exchange," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 505-10, August. [Downloadable!] (restricted)
  16. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April. [Downloadable!] (restricted)
  17. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring. [Downloadable!] (restricted)
  18. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October. [Downloadable!] (restricted)
  19. Ackert, Lucy F & Smith, Brian F, 1993. " Stock Price Volatility, Ordinary Dividends, and Other Cash Flows to Shareholders," Journal of Finance, American Finance Association, vol. 48(4), pages 1147-60, September. [Downloadable!] (restricted)
  20. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October. [Downloadable!] (restricted)
    Other versions:
  21. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389. [Downloadable!] (restricted)
  22. Schwert, G. William, 1989. "Business cycles, financial crises, and stock volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 31, pages 83-125. [Downloadable!] (restricted)
  23. Franklin Allen & Stephen Morris & Andrew Postlewaite, . "Finite Bubbles with Short Sale Constraints and Asymmetric Information (Reprint 042)," Rodney L. White Center for Financial Research Working Papers 16-92, Wharton School Rodney L. White Center for Financial Research.
  24. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
    Other versions:
  25. Cutler, David M & Poterba, James M & Summers, Lawrence H, 1991. "Speculative Dynamics," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 529-46, May. [Downloadable!] (restricted)
    Other versions:
  26. Jog, Vijay & Schaller, Huntley, 1994. "Finance constraints and asset pricing: Evidence on mean reversion," Journal of Empirical Finance, Elsevier, vol. 1(2), pages 193-209, January. [Downloadable!] (restricted)
    Other versions:
  27. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November. [Downloadable!] (restricted)
  28. Olivier J. Blanchard & Mark W. Watson, 1983. "Bubbles, Rational Expectations and Financial Markets," NBER Working Papers 0945, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  29. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333. [Downloadable!] (restricted)
    Other versions:
  30. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  31. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 813-36, October. [Downloadable!] (restricted)
  32. Timmermann, Allan G, 1993. "How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1135-45, November. [Downloadable!] (restricted)
  33. G. William Schwert, 1990. "Business Cycles, Financial Crises, and Stock Volatility," NBER Working Papers 2957, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  34. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September. [Downloadable!] (restricted)
  35. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December. [Downloadable!] (restricted)
  36. Leach, John, 1991. "Rational Speculation," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 131-44, February. [Downloadable!] (restricted)
  37. Bulow, Jeremy & Klemperer, Paul, 1994. "Rational Frenzies and Crashes," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 1-23, February. [Downloadable!] (restricted)
    Other versions:
  38. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May. [Downloadable!] (restricted)
  39. Barsky, Robert B & De Long, J Bradford, 1993. "Why Does the Stock Market Fluctuate?," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 291-311, May. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Isabelle Weberpals, 1997. "The Liquidity Trap: Evidence from Japan," Working Papers 97-4, Bank of Canada. [Downloadable!]
  2. Simon van Norden & Huntley Schaller & ), 1995. "Fads or Bubbles?," Econometrics 9502004, EconWPA, revised 06 Jun 1995. [Downloadable!]
    Other versions:
  3. Sandeep Patel & Asani Sarkar, 1998. "Stock market crises in developed and emerging markets," Research Paper 9809, Federal Reserve Bank of New York. [Downloadable!]
  4. Ryan SULEIMANN, 2003. "The Contagion Effect Between the Volatilities of the NASDAQ-100 and the IT.CA :A Univariate and A Bivariate Switching Approach," Econometrics 0307002, EconWPA, revised 18 Jul 2003. [Downloadable!]
  5. Barry Cozier & Greg Tkacz, . "The Term Structure and Real Activity in Canada," Working Papers 94-3, Bank of Canada. [Downloadable!]
    Other versions:
  6. Ryan SULEIMANN, 2003. "Should Stock Market Indexes Time Varying Correlations Be Taken Into Account? A Conditional Variance Multivariate Approach," Econometrics 0307004, EconWPA, revised 18 Jul 2003. [Downloadable!]
  7. Ryan SULEIMANN, 2003. "New Technology Stock Market Indexes Contagion: A VAR-dccMVGARCH Approach," Econometrics 0307003, EconWPA, revised 18 Jul 2003. [Downloadable!]
  8. Nick Chamie (Bank of Canada), & Alain DeSerres (Bank of Canada), & Rene Lalonde (Bank of Canada), . "Optimum Currency Areas and Shock Asymmetry: A Comparison of Europe and the United States," Working Papers 94-1, Bank of Canada. [Downloadable!]
  9. Nick Chamie & Alain DeSerres & Rene Lalonde, 1994. "Optimum Currency Areas and Shock Asymmetry A Comparison of Europe and the United States," International Finance 9406001, EconWPA, revised 23 Jun 1994. [Downloadable!]
  10. Kevin J. Lansing, 2007. "Rational and near-rational bubbles without drift," Working Paper Series 2007-10, Federal Reserve Bank of San Francisco. [Downloadable!]
  11. Simon van Norden, 1995. "Regime Switching as a Test for Exchange Rate Bubbles," Econometrics 9502001, EconWPA, revised 09 Aug 1995. [Downloadable!]
    Other versions:
  12. Vigfusson, R. & Van Norden, S., 1996. "Avoiding the Pitfalls: Can Regime-Switching Tests Detect Bubbles?," Working Papers 96-11, Bank of Canada. [Downloadable!]
    Other versions:
  13. Daniel Racette & Jacques Raynauld & Christian Sigouin, . "An Up-to-Date and Improved BVAR Model of the Canadian Economy," Working Papers 94-4, Bank of Canada. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? You can use IDEAS to provide links to papers and articles in your course syllabus.

This page was last updated on 2008-7-16.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.