IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Steady-State Distributions for Models of Bubbles: their Existence and Econometric Implications

  • John Knight

    (University of Western Ontario)

  • Stephen Satchell

    (Department of Economics, Mathematics & Statistics, Birkbeck
    University of Sydney)

  • Nandini Srivastava

    (Christ's College, University of Cambridge)

Registered author(s):

    The purpose of this paper is to examine the properties of bubbles in the light of steady state results for threshold auto-regressive (TAR) models recently derived by Knight and Satchell (2011). We assert that this will have implications for econometrics. We study the conditions under which we can obtain a steady state distribution of asset prices using our simple model of bubbles based on our particular definition of a bubble. We derive general results and further extend the analysis by considering the steady state distribution in three cases of a (I) a normally distributed error process, (II) a non normally (exponentially) distributed steady-state process and (III) a switching random walk with a fairly general i.i.d error process We then examine the issues related to unit root testing for the presence of bubbles using standard econometric procedures. We illustrate as an example, the market for art, which shows distinctly bubble-like characteristics. Our results shed light on the ubiquitous finding of no bubbles in the econometric literature.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.bbk.ac.uk/ems/research/wp/2012/PDFs/BWPEF1208.pdf
    File Function: First version, 2012
    Download Restriction: no

    Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 1208.

    as
    in new window

    Length:
    Date of creation: Apr 2012
    Date of revision:
    Handle: RePEc:bbk:bbkefp:1208
    Contact details of provider: Postal: Malet Street, London WC1E 7HX, UK
    Phone: 44-20- 76316429
    Fax: 44-20- 76316416
    Web page: http://www.ems.bbk.ac.uk/

    Order Information: Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September.
    2. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
    3. Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
    4. Harrison Hong & Jose Scheinkman & Wei Xiong, 2005. "Asset Float and Speculative Bubbles," Levine's Bibliography 122247000000000861, UCLA Department of Economics.
    5. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    6. Branch, William A. & Evans, George W., 2010. "Monetary Policy and Heterogeneous Expectations," SIRE Discussion Papers 2010-32, Scottish Institute for Research in Economics (SIRE).
    7. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
    8. Huntley Schaller & Simon van Norden, 1997. "Fads or Bubbles?," Working Papers 97-2, Bank of Canada.
    9. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
    10. Kevin J. Lansing, 2007. "Rational and near-rational bubbles without drift," Working Paper Series 2007-10, Federal Reserve Bank of San Francisco.
    11. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
    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 421-36, June.
    13. Azariadis, Costas & Guesnerie, Roger, 1986. "Sunspots and Cycles," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 725-37, October.
    14. Anderson, Robert C, 1974. "Paintings as an Investment," Economic Inquiry, Western Economic Association International, vol. 12(1), pages 13-26, March.
    15. Kenneth A. Froot & Maurice Obstfeld, 1989. "Intrinsic Bubbles: The Case of Stock Prices," NBER Working Papers 3091, National Bureau of Economic Research, Inc.
    16. Piergiorgio Alessandri, 2006. "Bubbles and fads in the stock market: another look at the experience of the US," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(3), pages 195-203.
    17. West, Kenneth D, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 553-80, August.
    18. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
    19. John R. Conlon, 2004. "Simple Finite Horizon Bubbles Robust to Higher Order Knowledge," Econometrica, Econometric Society, vol. 72(3), pages 927-936, 05.
    20. Leipus, Remigijus & Paulauskas, Vygantas & Surgailis, Donatas, 2005. "Renewal regime switching and stable limit laws," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 299-327.
    21. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
    22. 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 143-54, March-Apr.
    23. Camerer, Colin, 1989. " Bubbles and Fads in Asset Prices," Journal of Economic Surveys, Wiley Blackwell, vol. 3(1), pages 3-41.
    24. Behzad T. Diba & Herschel I. Grossman, 1984. "Rational Bubbles in the Price of Gold," NBER Working Papers 1300, National Bureau of Economic Research, Inc.
    25. Markus K. Brunnermeier & Stefan Nagel, 2004. "Hedge Funds and the Technology Bubble," Journal of Finance, American Finance Association, vol. 59(5), pages 2013-2040, October.
    26. Knight John & Satchell Stephen, 2011. "Some New Results for Threshold AR(1) Models," Journal of Time Series Econometrics, De Gruyter, vol. 3(2), pages 1-42, April.
    27. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    28. Bohl, Martin T., 2003. "Periodically collapsing bubbles in the US stock market?," International Review of Economics & Finance, Elsevier, vol. 12(3), pages 385-397.
    29. Roche, Maurice J., 2001. "The rise in house prices in Dublin: bubble, fad or just fundamentals," Economic Modelling, Elsevier, vol. 18(2), pages 281-295, April.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bbk:bbkefp:1208. 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: ()

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.