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

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  • Nael Al-Anaswah
  • Bernd Wilfling

Abstract

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.

Suggested Citation

  • Nael Al-Anaswah & Bernd Wilfling, 2009. "Identification of speculative bubbles using state-space models with Markov-switching," CQE Working Papers 0309, Center for Quantitative Economics (CQE), University of Muenster.
  • Handle: RePEc:cqe:wpaper:0309
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    3. Mehmet Balcilar & Rangan Gupta & Nico Frederick Katzke, 2015. "Identifying Periods of US Housing Market Explosivity," Working Papers 15-03, Eastern Mediterranean University, Department of Economics.
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    5. Chen, Shyh-Wei & Hsu, Chi-Sheng & Xie, Zixong, 2016. "Are there periodically collapsing bubbles in the stock markets? New international evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 442-451.
    6. Lammerding, Marc & Stephan, Patrick & Trede, Mark & Wilfling, Bernd, 2013. "Speculative bubbles in recent oil price dynamics: Evidence from a Bayesian Markov-switching state-space approach," Energy Economics, Elsevier, vol. 36(C), pages 491-502.
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    9. Bettendorf, Timo & Chen, Wenjuan, 2013. "Are there bubbles in the Sterling-dollar exchange rate? New evidence from sequential ADF tests," Economics Letters, Elsevier, vol. 120(2), pages 350-353.
    10. Rotermann, Benedikt & Wilfling, Bernd, 2014. "Periodically collapsing Evans bubbles and stock-price volatility," Economics Letters, Elsevier, vol. 123(3), pages 383-386.
    11. Chen, Shyh-Wei & Xie, Zixiong, 2017. "Asymmetric adjustment and smooth breaks in dividend yields: Evidence from international stock markets," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 339-354.
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    13. Balcilar, Mehmet & Katzke, Nico & Gupta, Rangan, 2017. "Date-stamping US housing market explosivity," Economics Discussion Papers 2017-44, Kiel Institute for the World Economy (IfW).
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    15. Xie, Zixiong & Chen, Shyh-Wei, 2015. "Are there periodically collapsing bubbles in the REIT markets? New evidence from the US," Research in International Business and Finance, Elsevier, vol. 33(C), pages 17-31.
    16. Benedikt Rotermann & Bernd Wilfling, 2015. "Estimating rational stock-market bubbles with sequential Monte Carlo methods," CQE Working Papers 4015, Center for Quantitative Economics (CQE), University of Muenster.
    17. Asako, Kazumi & Liu, Zhentao, 2013. "A statistical model of speculative bubbles, with applications to the stock markets of the United States, Japan, and China," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2639-2651.
    18. Chan, Kam Fong & Treepongkaruna, Sirimon & Brooks, Robert & Gray, Stephen, 2011. "Asset market linkages: Evidence from financial, commodity and real estate assets," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1415-1426, June.
    19. Baur, Dirk G. & Glover, Kristoffer J., 2015. "Speculative trading in the gold market," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 63-71.
    20. Rodríguez-Aguilar, Román & Cruz-Aké, Salvador & Venegas-Martínez, Francisco, 2014. "A Measure of Early Warning of Exchange-Rate Crises Based on the Hurst Coefficient and the Αlpha-Stable Parameter," MPRA Paper 59046, University Library of Munich, Germany.
    21. Kaizoji, Taisei & Leiss, Matthias & Saichev, Alexander & Sornette, Didier, 2015. "Super-exponential endogenous bubbles in an equilibrium model of fundamentalist and chartist traders," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 289-310.
    22. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis: A multivariate Markov-switching analysis," Economic Modelling, Elsevier, vol. 29(3), pages 943-973.

    More about this item

    Keywords

    Stock market dynamics; Detection of speculative bubbles; Present value models; State-space models with Markov-switching;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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