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Testing for the existence of a bubble in the stock market

  • Gerdesmeier, Dieter
  • Reimers, Hans-Eggert
  • Roffia, Barbara

Are specific developments in stock prices in line with fundamentals or do they reflect a rising bubble? And if the latter result applies, how is it possible to detect a bubble in real time? The answer to this question is of utmost relevance for a number of areas, not least for either financial market participants or for central banks aiming at pursuing a policy of 'leaning against the wind'. In this study, we make use of a sample of 17 OECD industrialised countries and the euro area over the sample period 1969 Q1 - 2008 Q3 and carry out univariate and multivariate panel tests to find evidence of bubbles in the stock market of those countries over the past four decades.

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Paper provided by Hochschule Wismar, Wismar Business School in its series Wismar Discussion Papers with number 01/2013.

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Date of creation: 2013
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Handle: RePEc:zbw:hswwdp:012013
Contact details of provider: Web page: http://www.wi.hs-wismar.de/

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  1. John Simon, 2003. "Three Australian Asset-price Bubbles," RBA Annual Conference Volume, in: Anthony Richards & Tim Robinson (ed.), Asset Prices and Monetary Policy Reserve Bank of Australia.
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  3. Owen Lamont, . "Earnings and Expected Returns," CRSP working papers 345, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  7. Nathan S. Balke & Mark E. Wohar, 2002. "Low-Frequency Movements in Stock Prices: A State-Space Decomposition," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 649-667, November.
  8. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  9. DETKEN Carsten & SMETS Frank, . "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
  10. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  11. Gerdesmeier, Dieter & Roffia, Barbara & Reimers, Hans-Eggert, 2009. "Asset price misalignments and the role of money and credit," Working Paper Series 1068, European Central Bank.
  12. Christophe Hurlin & Valérie Mignon, 2007. "Second Generation Panel Unit Root Tests," Working Papers halshs-00159842, HAL.
  13. Bohl, Martin T. & Siklos, Pierre L., 2004. "The present value model of U.S. stock prices redux: a new testing strategy and some evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 208-223, May.
  14. Kaddour Hadri, 1999. "Testing For Stationarity In Heterogeneous Panel Data," Research Papers 1999_04, University of Liverpool Management School.
  15. Koustas, Zisimos & Serletis, Apostolos, 2005. "Rational bubbles or persistent deviations from market fundamentals?," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2523-2539, October.
  16. Diba, Behzad T & Grossman, Herschel I, 1988. "The Theory of Rational Bubbles in Stock Prices," Economic Journal, Royal Economic Society, vol. 98(392), pages 746-54, September.
  17. Cerqueti, Roy & Costantini, Mauro, 2006. "Testing for rational bubbles," Economics & Statistics Discussion Papers esdp06030, University of Molise, Dept. EGSeI.
  18. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  19. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Intrinsic Bubbles: The Case of Stock Prices," American Economic Review, American Economic Association, vol. 81(5), pages 1189-214, December.
  20. Kanas, Angelos, 2005. "Nonlinearity in the stock price-dividend relation," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 583-606, June.
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  22. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August.
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  24. Chris Brooks & Apostolos Katsaris, 2003. "Rational Speculative Bubbles: An Empirical Investigation of the London Stock Exchange," Bulletin of Economic Research, Wiley Blackwell, vol. 55(4), pages 319-346, October.
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