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Do bubbles have an explosive signature in markov switching models?

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  • Balcombe, Kelvin
  • Fraser, Iain

Abstract

We investigate nine data series previously identified as containing bubbles using Bayesian Markov switching models. Nearly all series appear to display strong regime switching that could possibly be induced by ‘bubble’ processes, but in each case the type of model that best describes each price differs substantively. We pay particular attention to whether these series contain transient explosive roots, a feature which has been suggested to exist in several bubble formulations. Bayesian model averaging is employed which allows us to average across a range of submodels, so that our empirical findings are not based on only one well performing model. We show that explosive regimes may exist in many submodels, but only when the flexibility of the model is limited in other important respects. In particular, when Markov switching models allow for switching levels of error variance, explosive root regimes occur in only a minority of the series.

Suggested Citation

  • Balcombe, Kelvin & Fraser, Iain, 2017. "Do bubbles have an explosive signature in markov switching models?," Economic Modelling, Elsevier, vol. 66(C), pages 81-100.
  • Handle: RePEc:eee:ecmode:v:66:y:2017:i:c:p:81-100
    DOI: 10.1016/j.econmod.2017.06.001
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    References listed on IDEAS

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    Cited by:

    1. Charles Shaw, 2018. "Conditional heteroskedasticity in crypto-asset returns," Papers 1804.07978, arXiv.org, revised Dec 2018.
    2. Shaw, Charles, 2018. "Conditional heteroskedasticity in crypto-asset returns," MPRA Paper 90437, University Library of Munich, Germany.
    3. repec:eee:ememar:v:38:y:2019:i:c:p:364-376 is not listed on IDEAS
    4. Mawuli Segnon & Stelios Bekiros, 2019. "Forecasting Volatility in Cryptocurrency Markets," CQE Working Papers 7919, Center for Quantitative Economics (CQE), University of Muenster.

    More about this item

    Keywords

    Explosive root regimes; Transient explosive roots; Bubbles; Bayesian model averaging;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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