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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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    8. 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.
    9. 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.
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    14. 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.
    15. 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.
    16. Steenkamp, Daan, 2018. "Explosiveness in G11 currencies," Economic Modelling, Elsevier, vol. 68(C), pages 388-408.
    17. 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.
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