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Dating the Timeline of Financial Bubbles During the Subprime Crisis

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Listed:
  • Peter C. B. Phillips

    (Singapore Management University)

  • Jun Yu

Abstract

A recursive regression methodology is used to analyze the bubble characteristics of various financial time series during the subprime crisis. The methods provide a technology for identifying bubble behavior and consistent dating of their origination and collapse. Seven relevant financial series are investigated, including three financial assets (the Nasdaq index, home price index and asset-backed commercial paper), two commodities (the crude oil price and platinum price), one bond rate (Baa), and one exchange rate (Pound/USD). Statistically significant bubble characteristics are found in all of these series. The empirical estimates of the origination and collapse dates suggest an interesting migration mechanism among the financial variables : a bubble first emerged in the equity market during mid-1995 lasting to the end of 2000, followed by a bubble in the real estate market between January 2001 and July 2007 and in the mortgage market between November 2005 and August 2007. After the subprime crisis erupted, the phenomenon migrated selectively into the commodity market and the foreign exchange market, creating bubbles which subsequently burst at the end of 2008, just as the effects on the real economy and economic growth became manifest. Our empirical estimates of the origination and collapse dates support strongly the general features of the scenario of this crisis put forward in a recent study by Caballero, Farhi and Gourinchas (2008).

Suggested Citation

  • Peter C. B. Phillips & Jun Yu, 2009. "Dating the Timeline of Financial Bubbles During the Subprime Crisis," Finance Working Papers 23051, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:financ:23051
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    References listed on IDEAS

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    1. Emmanuel Farhi & Ricardo Caballero & Pierre-Olivier Gourinchas, "undated". "Financial Crash, Commodity Prices and Global Imbalances," Working Paper 20933, Harvard University OpenScholar.
    2. 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.
    3. Andrew Ang & Geert Bekaert, 2007. "Stock Return Predictability: Is it There?," Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 651-707.
    4. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, Taylor & Francis Journals, vol. 45(6), pages 93-119.
    5. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-530, June.
    6. Behzad T. Diba & Herschel I. Grossman, 1985. "Rational Bubbles in Stock Prices?," NBER Working Papers 1779, National Bureau of Economic Research, Inc.
    7. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    8. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
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    More about this item

    Keywords

    Financial bubbles; Crashes; Date stamping; Explosive behavior; Mildly explosive process; Subprime crisis; Timeline.;
    All these keywords.

    JEL classification:

    • 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

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