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Are we in a bubble? A simple time-series-based diagnostic

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  • Franses, Ph.H.B.F.

Abstract

Time series with bubble-like patterns display an unbalance between growth and acceleration, in the sense that growth in the upswing is “too fast” and then there is a collapse. In fact, such time series show periods where both the first differences (1-L) and the second differences (1-L)2 of the data are positive-valued, after which period there is a collapse. For a time series without such bubbles, it can be shown that 1-L2 differenced data should be stable. A simple test based on one-step-ahead forecast errors can now be used to timely monitor whether a series experiences a bubble and also whether a collapse is near. Illustration on simulated data and on two housing prices and the Nikkei index illustrates the practical relevance of the new diagnostic. Monte Carlo simulations indicate that the empirical power of the test is high.

Suggested Citation

  • Franses, Ph.H.B.F., 2013. "Are we in a bubble? A simple time-series-based diagnostic," Econometric Institute Research Papers EI 2013-12, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  • Handle: RePEc:ems:eureir:39598
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    References listed on IDEAS

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    Cited by:

    1. Virtanen, Timo & Tölö, Eero & Virén, Matti & Taipalus, Katja, 2016. "Use of unit root methods in early warning of financial crises," Research Discussion Papers 27/2016, Bank of Finland.
    2. Timo Virtanen & Eero Tölö & Matti Virén & Katja Taipalus, 2017. "Use of unit root methods in early warning of financial crises," ESRB Working Paper Series 45, European Systemic Risk Board.

    More about this item

    Keywords

    acceleration; growth; speculative bubbles; test;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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