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Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?

  • Peter C.B.Phillips

    (Yale University, University of Auckland,University of York & Singapore Management University)

  • Yangru Wu

    (Rutgers Business School-Newark & New Brunswick, Rutgers University, & Chinese Academy of Finance and Development, Central University of Finance and Economics)

  • Jun Yu

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

A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date-stamping the origination and collapse of economic exuberance, and providing valid con¡¥dence intervals for explosive growth rates. The method involves the recursive im- plementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides con¡¥rmation of ex- plosiveness and date-stamps the origination of ¡¥nancial exuberance to mid -1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in ¡¥nancial market, thereby giving the remark empirical content.

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Paper provided by Sim Kee Boon Institute for Financial Economics in its series Working Papers with number CoFie-03-2008.

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Length: 36 Pages
Date of creation: Apr 2009
Date of revision:
Publication status: Published in SMU-SKBI CoFie Working Paper
Handle: RePEc:skb:wpaper:cofie-03-2008
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