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Testing for Speculative Bubbles in Stock Markets: A Comparison of Alternative Methods

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  • Ulrich Homm
  • Jörg Breitung

Abstract

We propose several tests for rational bubbles and investigate their power properties. The focus lies on the case where bubble detection is reduced to testing for a unknown change from a random walk to an explosive process. In simulations, a Chow-type break test exhibits the highest power and performs well relative to the power envelope. The Chow-type procedure also provides a reliable estimator for the break date. Furthermore, we suggest monitoring procedures for detecting speculative bubbles in real time. As applications, we analyze the Nasdaq composite index and various other financial time series. Copyright The Author 2011. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Ulrich Homm & Jörg Breitung, 2010. "Testing for Speculative Bubbles in Stock Markets: A Comparison of Alternative Methods," Journal of Financial Econometrics, Oxford University Press, vol. 10(1), pages 198-231, 2012 10 1.
    • Handle: RePEc:oup:jfinec:v:10:y:2010:i:1:p:198-231
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbr009
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    Citations

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    Cited by:

    1. Peter C.B. Phillips & Shu-Ping Shi & Jun Yu, 2011. "Testing for Multiple Bubbles," Working Papers 09-2011, Singapore Management University, School of Economics.
    2. Jörg Breitung & Robinson Kruse, 2013. "When bubbles burst: econometric tests based on structural breaks," Statistical Papers, Springer, vol. 54(4), pages 911-930, November.
    3. Clark, Steven P. & Coggin, T. Daniel, 2011. "Was there a U.S. house price bubble? An econometric analysis using national and regional panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(2), pages 189-200, May.
    4. Robinson Kruse & Christoph Wegener, 2019. "Explosive behaviour and long memory with an application to European bond yield spreads," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 139-153, February.
    5. Wei, Yigang & Li, Yan & Wang, Zhicheng, 2022. "Multiple price bubbles in global major emission trading schemes: Evidence from European Union, New Zealand, South Korea and China," Energy Economics, Elsevier, vol. 113(C).
    6. Riza Demirer & Guilherme Demos & Rangan Gupta & Didier Sornette, 2019. "On the predictability of stock market bubbles: evidence from LPPLS confidence multi-scale indicators," Quantitative Finance, Taylor & Francis Journals, vol. 19(5), pages 843-858, May.

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