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In-Sample and Out-of-Sample Prediction of Stock Market Bubbles: Cross-Sectional Evidence

Listed author(s):
  • Helmut Herwartz
  • Konstantin A. Kholodilin

We evaluate the informational content of ex post and ex ante predictors of periods of excess stock (market) valuation. For a cross section comprising 10 OECD economies and a time span of at most 40 years alternative binary chronologies of price bubble periods are determined. Using these chronologies as dependent processes and a set of macroeconomic and financial variables as explanatory variables, logit regressions are carried out. With model estimates at hand, both in-sample and out-of-sample forecasts are made. Overall, the degree of ex ante predictability is limited if an analyst targets the detection of particular turning points of market valuation. The set of 13 potential predictors is classified in measures of macroeconomic or monetary performance, stock market characteristics, and descriptors of capital valuation. The latter turn out to have strongest in-sample and out-of-sample explanatory content for the emergence of price bubbles. In particular, the price to book ratio is fruitful to improve the ex-ante signalling of stock price bubbles.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.388967.de/dp1173.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1173.

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Length: 39 p.
Date of creation: 2011
Handle: RePEc:diw:diwwpp:dp1173
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