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Robust Testing for Explosive Behavior with Strongly Dependent Errors

Author

Listed:
  • Yiu Lim Lui

    (Dongbei University of Finance and Economics)

  • Peter C.B. Phillips

    (Yale University)

  • Jun Yu

    (Singapore Management University)

Abstract

A heteroskedasticity-autocorrelation robust (HAR) test statistic is proposed to test for the presence of explosive roots in financial or real asset prices when the equation errors are strongly dependent. Limit theory for the test statistic is developed and extended to heteroskedastic models. The new test has stable size properties unlike conventional test statistics that typically lead to size distortion and inconsistency in the presence of strongly dependent equation errors. The new procedure can be used to consistently time-stamp the origination and termination of an explosive episode under similar conditions of long memory errors. Simulations are conducted to assess the finite sample performance of the proposed test and estimators. An empirical application to the S&P 500 index highlights the usefulness of the proposed procedures in practical work.

Suggested Citation

  • Yiu Lim Lui & Peter C.B. Phillips & Jun Yu, 2022. "Robust Testing for Explosive Behavior with Strongly Dependent Errors," Economics and Statistics Working Papers 11-2022, Singapore Management University, School of Economics.
    • Handle: RePEc:ris:smuesw:2022_011
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    Cited by:

    1. Nicole Branger & Mark Trede & Bernd Wilfling, 2024. "Extracting stock-market bubbles from dividend futures," CQE Working Papers 10724, Center for Quantitative Economics (CQE), University of Muenster.
    2. Skrobotov Anton, 2023. "Testing for explosive bubbles: a review," Dependence Modeling, De Gruyter, vol. 11(1), pages 1-26, January.

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    Keywords

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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises

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