IDEAS home Printed from
   My bibliography  Save this article

Beyond Bubbles: The Role of Asset Prices in Early-Warning Indicators


  • Esteban Gómez


  • Sandra Rozo



Asset prices have recently become a common topicin economic debate. Nevertheless, much time hasbeen spent in determining if they effectively exhibita bubble component, and not in examining whetherasset prices contain relevant information concerningfuture market developments. This paper is aneffort in this direction, aimed towards the constructionof early-warning indicators for Colombia usingfinancial and real variables. Results show evidenceto support that there is relevant information embeddedin these series, as all indicators (except the newhousing price indicator) show a significant deviationfor the year(s) prior to the 98-99 crisis. Additionally,the exercises here conducted show that theperformance of asset price indicators is enhancedby including credit and investment. When the early-warning indicators are on, the role of the policymaker should be more active in the market; notnecessarily in terms of altering interest rates, butin communicating with market agents, promotingportfolio diversification and urging financial agentsto make the best use of the risk-management toolsthat are available to them.

Suggested Citation

  • Esteban Gómez & Sandra Rozo, 2008. "Beyond Bubbles: The Role of Asset Prices in Early-Warning Indicators," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 26(56), pages 114-148, June.
  • Handle: RePEc:col:000107:005290

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Villar Gómez Leonardo & David M. Salamanca Rojas & Andrés Murcia Pabón, 2005. "Crédito, represión financiera y flujos de capitales en Colombia: 1974-2003," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, May.
    2. Refet S. Gürkaynak, 2008. "Econometric Tests Of Asset Price Bubbles: Taking Stock ," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 166-186, February.
    3. Wu, Yangru, 1997. "Rational Bubbles in the Stock Market: Accounting for the U.S. Stock-Price Volatility," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 309-319, April.
    4. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 47-100, January.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. van Norden Simon & Vigfusson Robert, 1998. "Avoiding the Pitfalls: Can Regime-Switching Tests Reliably Detect Bubbles?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(1), pages 1-24, April.
    7. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-530, June.
    8. Behzad T. Diba & Herschel I. Grossman, 1985. "Rational Bubbles in Stock Prices?," NBER Working Papers 1779, National Bureau of Economic Research, Inc.
    9. Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July.
    10. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    11. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
    12. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    13. Sa, S., 2006. "Capital flows and credit booms in emerging market economies?," Financial Stability Review, Banque de France, issue 9, pages 49-66, December.
    14. Martha López, 2006. "House Prices and Monetary Policy in Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 24(50), pages 212-241, June.
    15. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-930, September.
    16. Dezhbakhsh, Hashem & Demirguc-Kunt, Asli, 1990. "On the Presence of Speculative Bubbles in Stock Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(01), pages 101-112, March.
    17. Kenneth D. West, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 553-580.
    18. Fernando Tenjo Galarza & Luisa F. Charry & Martha López P. & Juan M.Ramírez C., 2007. "Acelerador Financiero y Ciclos Económicos en Colombia: Un Ejercicio Exploratorio," Borradores de Economia 451, Banco de la Republica de Colombia.
    19. Cochrane, John H, 1992. "Explaining the Variance of Price-Dividend Ratios," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 243-280.
    20. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-1214, December.
    21. Robert P. Flood & Robert J. Hodrick & Paul Kaplan, 1986. "An Evaluation of Recent Evidence on Stock Market Bubbles," NBER Working Papers 1971, National Bureau of Economic Research, Inc.
    22. Coudert, V. & Gex, M., 2006. "Can risk aversion indicators anticipate financial crises?," Financial Stability Review, Banque de France, issue 9, pages 67-87, December.
    23. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-754, September.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Ponomarenko, Alexey, 2013. "Early warning indicators of asset price boom/bust cycles in emerging markets," Emerging Markets Review, Elsevier, vol. 15(C), pages 92-106.
    2. Esteban Gómez & Andrés Murcia & Nancy Zamudio, 2011. "Financial Conditions Index: Early and Leading Indicator for Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 29(66), pages 174-220, December.
    3. Kauko, Karlo, 2014. "How to foresee banking crises? A survey of the empirical literature," Economic Systems, Elsevier, vol. 38(3), pages 289-308.
    4. Seoung Hwan Suh & Kabsung Kim, 2014. "Global financial crisis and early warning system of Korean housing market," Chapters,in: The Global Financial Crisis and Housing, chapter 4, pages 62-81 Edward Elgar Publishing.

    More about this item


    Asset Price Bubbles; Early-WarningIndicators; Financial Crisis; Prudential Regulation.;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:col:000107:005290. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Espe). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.