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Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test

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  • Hall, Stephen G
  • Psaradakis, Zacharias
  • Sola, Martin

Abstract

This paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals. As this is essentially a problem of identifying the collapsing periods from the expanding ones, we propose using a generalization of the Dickey-Fuller test procedure which makes use of the class of Markov regime-switching models. The potential of the new methodology is illustrated via simulation, and an empirical example is given.

Suggested Citation

  • Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-154, March-Apr.
  • Handle: RePEc:jae:japmet:v:14:y:1999:i:2:p:143-54
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    File URL: http://qed.econ.queensu.ca:80/jae/1999-v14.2/
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