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A New Test for Rational Speculative Bubbles using Forward Exchange Rates: The Case of the Interwar German Hyperinflation

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  • Efthymios Pavlidis
  • Ivan Paya
  • David Peel

Abstract

The probabilistic structure of periodically collapsing bubbles implies different values for the slope coefficient of alternative efficient market hypothesis tests depending on whether the bubble is in an explosive regime or not. We exploit this fact and propose a new method for bubble detection. The method does not require the specification of the process followed by fundamentals, it is not affected by a possible explosive root of the determinants of the asset price, and provides a date-stamping strategy. We analyze the Reichsmark/Dollar exchange rate for the interwar German hyperinflation period and identify periods of rational exuberance.

Suggested Citation

  • Efthymios Pavlidis & Ivan Paya & David Peel, 2012. "A New Test for Rational Speculative Bubbles using Forward Exchange Rates: The Case of the Interwar German Hyperinflation," Working Papers 18599597, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:18599597
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    References listed on IDEAS

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    2. Tie-Ying Liu & Hsu-Ling Chang & Chi-Wei Su & Xu-Zhao Jiang, 2016. "China's housing bubble burst?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(2), pages 361-389, April.
    3. Yan Li & Zhicheng Wang & Hongchuan Wang & Meiyu Wu & Lingling Xie, 2021. "Identifying price bubble periods in the Bitcoin market-based on GSADF model," Quality & Quantity: International Journal of Methodology, Springer, vol. 55(5), pages 1829-1844, October.
    4. Peter C.B. Phillips & Shu-Ping Shi, 2014. "Financial Bubble Implosion," Cowles Foundation Discussion Papers 1967, Cowles Foundation for Research in Economics, Yale University.
    5. Xin Li & Chi-Wei Su & Meng Qin & Fahai Zhao, 2020. "Testing for Bubbles in the Chinese Art Market," SAGE Open, , vol. 10(1), pages 21582440199, January.
    6. Su, Chi Wei & Qin, Meng & Chang, Hsu-Ling & Țăran, Alexandra-Mădălina, 2023. "Which risks drive European natural gas bubbles? Novel evidence from geopolitics and climate," Resources Policy, Elsevier, vol. 81(C).
    7. Su, Chi-Wei & Li, Zheng-Zheng & Tao, Ran & Si, Deng-Kui, 2018. "Testing for multiple bubbles in bitcoin markets: A generalized sup ADF test," Japan and the World Economy, Elsevier, vol. 46(C), pages 56-63.
    8. Tie Ying Liu & Chi Wei Su & Xu Zhao Jiang & Tsangyao Chang, 2015. "Is There Excess Liquidity in China?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 23(3), pages 110-126, May.
    9. Qin, Meng & Mirza, Nawazish & Su, Chi-Wei & Umar, Muhammad, 2023. "Exploring Bubbles in the Digital Economy: The Case of China," Global Finance Journal, Elsevier, vol. 57(C).
    10. Moreira, Afonso M. & Martins, Luis F., 2020. "A new mechanism for anticipating price exuberance," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 199-221.
    11. Steenkamp, Daan, 2018. "Explosiveness in G11 currencies," Economic Modelling, Elsevier, vol. 68(C), pages 388-408.
    12. 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.
    13. Kruse, Yves Robinson & Kaufmann, Hendrik, 2015. "Bias-corrected estimation in mildly explosive autoregressions," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112897, Verein für Socialpolitik / German Economic Association.
    14. Su, Chi-Wei & Li, Zheng-Zheng & Chang, Hsu-Ling & Lobonţ, Oana-Ramona, 2017. "When Will Occur the Crude Oil Bubbles?," Energy Policy, Elsevier, vol. 102(C), pages 1-6.
    15. Hendrik Kaufmannz & Robinson Kruse, 2013. "Bias-corrected estimation in potentially mildly explosive autoregressive models," CREATES Research Papers 2013-10, Department of Economics and Business Economics, Aarhus University.
    16. Zhao, Yanping & Chang, Hsu-Ling & Su, Chi-Wei & Nian, Rui, 2015. "Gold bubbles: When are they most likely to occur?," Japan and the World Economy, Elsevier, vol. 34, pages 17-23.
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    18. Zheng-Zheng Li & Ran Tao & Chi-Wei Su & Oana-Ramona Lobonţ, 2019. "Does Bitcoin bubble burst?," Quality & Quantity: International Journal of Methodology, Springer, vol. 53(1), pages 91-105, January.
    19. Li, Zheng-Zheng & Su, Chi-Wei & Chang, Tsangyao & Lobonţ, Oana-Ramona, 2022. "Policy-driven or market-driven? Evidence from steam coal price bubbles in China," Resources Policy, Elsevier, vol. 78(C).

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