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SpeciÖcation Sensitivities in Right-Tailed Unit Root Testing for Financial Bubbles

Author

Listed:
  • Shu-Ping Shi

    (The Australian National University)

  • Peter C. B. Phillips

    (Yale University)

  • Jun Yu

    (Sim Kee Boon Institute for Financial Economics, Singapore Management University)

Abstract

Right-tailed unit root tests have proved promising for detecting exuberance in economic and Önancial activities. Like left-tailed tests, the limit theory and test performance are sensitive to the null hypothesis and the model speciÖcation used in parameter estimation. This paper aims to provide some empirical guidelines for the practical implementation of right-tailed unit root tests, focussing on the sup ADF test of Phillips, Wu and Yu (2011), which implements a right-tailed ADF test repeatedly on a sequence of forward sample recursions. We analyze and compare the limit theory of the sup ADF test under di§erent hypotheses and model speciÖcations. The size and power properties of the test under various scenarios are examined in simulations and some recommendations for empirical practice are given. An empirical application to Nasdaq data reveals the practical importance of model speciÖcation on test outcomes.

Suggested Citation

  • Shu-Ping Shi & Peter C. B. Phillips & Jun Yu, 2011. "SpeciÖcation Sensitivities in Right-Tailed Unit Root Testing for Financial Bubbles," Working Papers CoFie-01-2011, Singapore Management University, Sim Kee Boon Institute for Financial Economics.
    • Handle: RePEc:skb:wpaper:cofie-01-2011
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    File URL: http://skbi.smu.edu.sg/downloads/skbi/CoFiE/Working%20Papers/Specification%20Sensitivities%20in%20Right-Tailed%20Unit%20Root%20Testing%20for%20Financial%20Bubbles.pdf
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    Cited by:

    1. Peter C.B. Phillips & Shu-Ping Shi, 2014. "Financial Bubble Implosion," Cowles Foundation Discussion Papers 1967, Cowles Foundation for Research in Economics, Yale University.
    2. Yoon, Gawon, 2012. "Explosive U.S. budget deficit," Economic Modelling, Elsevier, vol. 29(4), pages 1076-1080.
    3. Xi-Xi Zhang & Lu Liu & Chi-Wei Su & Ran Tao & Oana-Ramona Lobonţ & Nicoleta-Claudia Moldovan, 2019. "Bubbles in Agricultural Commodity Markets of China," Complexity, Hindawi, vol. 2019, pages 1-7, December.

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    Keywords

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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • 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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