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Do Bubbles Spill Over? Estimating Financial Bubbles in Emerging Markets

  • Ozan Hatipoglu
  • Onur Uyar

The close correlation among the stock price indices of a relatively large number of developed and emerging markets indicates that bubbles might spill over from one country to another. To test for such spillover effects, we estimate the bubble component of price changes using a nonlinear, structural, state-space model with time-variable parameters. We apply directionality tests to bubbles formed in the United States and Turkey. We find that bubbles originating in the United States lead to bubbles in Turkey. We provide empirical evidence on bubbles formed during the major financial crises of the past two decades in Turkey and the past century in the United States. Despite the improvement in fundamentals and overall economic performance, we find the Turkish asset market is still subject to volatile financial bubbles that might stem from abroad.

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Paper provided by Bogazici University, Department of Economics in its series Working Papers with number 2011/06.

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Date of creation: Jun 2011
Date of revision:
Handle: RePEc:bou:wpaper:2011/06
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  1. Dezhbakhsh, Hashem & Demirguc-Kunt, Asli, 1990. "On the Presence of Speculative Bubbles in Stock Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(01), pages 101-112, March.
  2. Peter Rappoport & Eugene N. White, 1991. "Was there a bubble in the 1929 Stock Market?," NBER Working Papers 3612, National Bureau of Economic Research, Inc.
  3. 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.
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  5. Huntley Schaller & Simon van Norden, 1997. "Fads or Bubbles?," Working Papers 97-2, Bank of Canada.
  6. Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July.
  7. Koustas, Zisimos & Serletis, Apostolos, 2005. "Rational bubbles or persistent deviations from market fundamentals?," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2523-2539, October.
  8. Behzad T. Diba & Herschel I. Grossman, 1985. "Rational Bubbles in Stock Prices?," NBER Working Papers 1779, National Bureau of Economic Research, Inc.
  9. van Norden Simon & Vigfusson Robert, 1998. "Avoiding the Pitfalls: Can Regime-Switching Tests Reliably Detect Bubbles?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(1), pages 1-24, April.
  10. Rita D'Ecclesia & Mauro Costantini, 2006. "Comovements and correlations in international stock markets," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 567-582.
  11. Refet S. Gürkaynak, 2008. "Econometric Tests Of Asset Price Bubbles: Taking Stock ," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 166-186, 02.
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