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Testing for Bubbles in Stock Markets With Irregular Dividend Distribution

Author

Listed:
  • Itamar Caspi

    (Bank of Israel)

  • Meital Graham

    (Bank of Israel)

Abstract

Recursive right-tailed unit root tests have recently become a popular tool to test the existence of stock price bubbles. These tests require continuous data on dividend distribution that is not always available, in particular when it comes to sectoral indexes or individual stocks. In this paper we show that it is possible to circumvent this problem by applying the test to an equity bubble using the book-to-market ratio. We illustrate our framework by testing for a bubble in the Israeli stock market, where data on continuous dividend distribution are uncommon.

Suggested Citation

  • Itamar Caspi & Meital Graham, 2016. "Testing for Bubbles in Stock Markets With Irregular Dividend Distribution," Bank of Israel Working Papers 2016.06, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2016.06
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    References listed on IDEAS

    as
    1. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2015. "Leveraged bubbles," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 1-20.
    2. Tuomo Vuolteenaho, 2002. "What Drives Firm‐Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    3. Caspi, Itamar, 2013. "Rtadf: Testing for Bubbles with EViews," MPRA Paper 58791, University Library of Munich, Germany, revised 06 Sep 2014.
    4. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," The Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
    5. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, February.
    6. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Historical Episodes Of Exuberance And Collapse In The S&P 500," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1043-1078, November.
    7. Itamar Caspi, 2015. "Testing for a Housing Bubble at the National and Regional Level: The Case of Israel," Bank of Israel Working Papers 2015.05, Bank of Israel.
    8. Peter C. B. Phillips & Jun Yu, 2011. "Dating the timeline of financial bubbles during the subprime crisis," Quantitative Economics, Econometric Society, vol. 2(3), pages 455-491, November.
    9. Peter C. B. Phillips & Shuping Shi, 2019. "Detecting Financial Collapse and Ballooning Sovereign Risk," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(6), pages 1336-1361, December.
    10. Phillips, Peter C.B. & Magdalinos, Tassos, 2007. "Limit theory for moderate deviations from a unit root," Journal of Econometrics, Elsevier, vol. 136(1), pages 115-130, January.
    11. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2016. "Bubbles, Credit, and Their Consequences," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    12. Tsangyao Chang & Luis Gil-Alana & Goodness C. Aye & Rangan Gupta & Omid Ranjbar, 2016. "Testing for bubbles in the BRICS stock markets," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 43(4), pages 646-660, September.
    13. Christos Alexakis & Guillaume Bagnarosa & Michael Dowling, 2017. "Do cointegrated commodities bubble together? the case of hog, corn, and soybean," Post-Print hal-02002169, HAL.
    14. Alexakis, Christos & Bagnarosa, Guillaume & Dowling, Michael, 2017. "Do cointegrated commodities bubble together? the case of hog, corn, and soybean," Finance Research Letters, Elsevier, vol. 23(C), pages 96-102.
    15. Caspi, Itamar & Katzke, Nico & Gupta, Rangan, 2018. "Date stamping historical periods of oil price explosivity: 1876–2014," Energy Economics, Elsevier, vol. 70(C), pages 582-587.
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    Cited by:

    1. Yao, Can-Zhong & Li, Hong-Yu, 2021. "A study on the bursting point of Bitcoin based on the BSADF and LPPLS methods," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    2. Emily J. Whitehouse & David I. Harvey & Stephen J. Leybourne, 2023. "Real‐Time Monitoring of Bubbles and Crashes," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(3), pages 482-513, June.
    3. Yuchao Fan, 2022. "Dissecting the dot-com bubble in the 1990s NASDAQ," Papers 2206.14130, arXiv.org, revised Jul 2022.

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    More about this item

    Keywords

    Bubbles; stock markets; book to market; explosive root; GSADF test; Israel;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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