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Identification of speculative bubbles using state-space models with Markov-switching

  • Nael Al-Anaswah
  • Bernd Wilfling

In this paper we use a state-space model with Markov-switching to detect speculative bubbles in stock-price data. Our two innovations are (1) to adapt this technology to the state-space representation of a well-known present-value stock-price model, and (2) to estimate the model via Kalman-filtering using a plethora of artificial as well as real-world data sets that are known to contain bubble periods. Analyzing the smoothed regime probabilities, we find that our technology is well suited to detecting stock-price bubbles in both types of data sets.

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File URL: http://www1.wiwi.uni-muenster.de/cqe/forschung/publikationen/cqe-working-papers/CQE_WP_3_2009.pdf
File Function: Version of September, 2009
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Paper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 0309.

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Length: 35 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:cqe:wpaper:0309
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