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Dating the Timeline of Financial Bubbles During the Subprime Crisis

  • Peter C. B. Phillips

    (Singapore Management University)

  • Jun Yu

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).

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File URL: http://www.eaber.org/node/23051
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Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23051.

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Date of creation: Jan 2009
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Handle: RePEc:eab:financ:23051
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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  1. Caballero, Ricardo J & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2006. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," Center for International and Development Economics Research, Working Paper Series qt7xc0g8mm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "Financial Crash, Commodity Prices and Global Imbalances," CEPR Discussion Papers 7064, C.E.P.R. Discussion Papers.
  3. Behzad T. Diba & Herschel I. Grossman, 1989. "Rational Bubbles in Stock Prices?," NBER Working Papers 1779, National Bureau of Economic Research, Inc.
  4. Peter C.B. PHILIPS & Yangru WU & Jun YU, 2009. "Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?," Working Papers 19-2009, Singapore Management University, School of Economics.
  5. Peter C.B. Phillips & Tassos Magdalinos, 2004. "Limit Theory for Moderate Deviations from a Unit Root," Cowles Foundation Discussion Papers 1471, Cowles Foundation for Research in Economics, Yale University.
  6. Dean Baker, 2002. "The Run-up in Home Prices: A Bubble," Challenge, M.E. Sharpe, Inc., vol. 45(6), pages 93-119, November.
  7. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  8. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  9. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
  10. Peter C.B. Phillips & Tassos Magdalinos, 2008. "Unit Root and Cointegrating Limit Theory When Initialization Is in the Infinite Past," Cowles Foundation Discussion Papers 1655, Cowles Foundation for Research in Economics, Yale University.
  11. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September.
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