Testing for rational bubbles in a co-explosive vector autoregression
We derive the parameter restrictions that a standard equity market model implies for a bivariate vector autoregression for stock prices and dividends, and we show how to test these restrictions using likelihood ratio tests.� The restrictions, which imply that stock returns are unpredictable, are derived both for a model without bubbles and for a model with a rational bubble.� In both cases we show how the restrictions can be tested through standard chi-squared inference.� The analysis for the no-bubble case is done within the traditional Johansen model for I(1) variables, while the bubble model is analysed using a co-explosive framework.� The methodology is illustrated using US stock prices and dividends for the period 1872-2000.
|Date of creation:||01 Jun 2010|
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