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Market fundamentals versus speculative bubbles. A new test applied to the German hyperinflation

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  • Blackburn, K.
  • Sola, M.

Abstract

We develop and apply a method of testing for speculative bubbles. The method is designed to overcome two well-known problems in the identification of bubble phenomena--the problem of distinguishing any type of bubble from an expected future change in market fundamentals and the problem of detecting a periodically-collapsing bubble when the residuals of the fundamentals regression are integrated. We propose the strategy of estimating a switching regime model of market prices, partialling out expected changes in fundamentals and carefully analysing the properties of the residuals. Extending our analysis, we also propose a more direct test for bubbles, based on the estimation of the general (fundamentals-plus-bubble) solution for market prices. We apply our methodology to the study of German hyperinflation in the 1920s. We find evidence consistent with the existence of a bubble during that hyperinflation. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.
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Suggested Citation

  • Blackburn, K. & Sola, M., 1992. "Market fundamentals versus speculative bubbles. A new test applied to the German hyperinflation," Discussion Paper Series In Economics And Econometrics 9208, Economics Division, School of Social Sciences, University of Southampton.
  • Handle: RePEc:stn:sotoec:9208
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    Cited by:

    1. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics.
    2. Juha Junttila, 2003. "Detecting speculative bubbles in an IT-intensive stock market," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(2), pages 166-189, June.
    3. Keith Anderson & Chris Brooks & Sotiris Tsolacos, 2009. "Testing for periodically collapsing rational speculative bubbles in US REITs," ICMA Centre Discussion Papers in Finance icma-dp2009-11, Henley Business School, Reading University.
    4. Mark A. Hooker, 1997. "Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence," Finance and Economics Discussion Series 1997-49, Board of Governors of the Federal Reserve System (U.S.).
    5. Hooker, Mark A., 2000. "Misspecification versus bubbles in hyperinflation data: Monte Carlo and interwar European evidence," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 583-600, August.
    6. Jirasakuldech, Benjamas & Emekter, Riza & Rao, Ramesh P., 2008. "Do Thai stock prices deviate from fundamental values?," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 298-315, June.
    7. Hing Chan & Kai Woo, 2006. "Bubbles detection for inter-war European hyperinflation: A threshold cointegration approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 30(2), pages 169-185, June.

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