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A Novel Test for the Presence of Local Explosive Dynamics

Author

Listed:
  • F. Blasques
  • S. J. Koopman
  • G. Mingoli
  • S. Telg

Abstract

In economics and finance, speculative bubbles take the form of locally explosive dynamics that eventually collapse. We propose a test for the presence of speculative bubbles in the context of mixed causal‐noncausal autoregressive processes. The test exploits the fact that bubbles are anticipative, that is, they are generated by an extreme shock in the forward‐looking dynamics. In particular, the test uses both path‐level deviations and growth rates to assess the presence of a bubble of a given duration and size, at any moment in time. We show that the distribution of the test statistic can be either analytically determined or numerically approximated, depending on the error distribution. Size and power properties of the test are analyzed in controlled Monte Carlo experiments. An empirical application is presented for a monthly oil price index. It demonstrates the ability of the test to detect bubbles and to provide valuable insights in terms of risk assessments in the spirit of Value‐at‐Risk.

Suggested Citation

  • F. Blasques & S. J. Koopman & G. Mingoli & S. Telg, 2025. "A Novel Test for the Presence of Local Explosive Dynamics," Journal of Time Series Analysis, Wiley Blackwell, vol. 46(5), pages 966-980, September.
    • Handle: RePEc:bla:jtsera:v:46:y:2025:i:5:p:966-980
    DOI: 10.1111/jtsa.70001
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    Cited by:

    1. Aryan Manafi Neyazi, 2025. "Generalized Covariance Estimator under Misspecification and Constraints," Papers 2509.13492, arXiv.org.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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