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A Heterogenous Agent Foundation for Tests of Asset Price Bubbles

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  • Vipin Arora
  • Shuping Shi

Abstract

We provide heterogenous agent foundations for regime-switching tests of asset price bubbles, and illustrate by applying the models to historical U.S. stock market data. While the tests remain unchanged, we show the specification of regimes can be based on the beliefs of investors that come from an underlying heterogenous agent model. This allows consideration of alternative specifications for investor beliefs, straightforward interpretation of extensions to more than three regimes, and added exibility in determining the evolution of beliefs. Our empirical example shows that this can lead to results which differ from traditional regime-switching models.

Suggested Citation

  • Vipin Arora & Shuping Shi, 2013. "A Heterogenous Agent Foundation for Tests of Asset Price Bubbles," CAMA Working Papers 2013-35, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2013-35
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-05/35_2013_arora_shi.pdf
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    References listed on IDEAS

    as
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    5. van Norden, Simon, 1996. "Regime Switching as a Test for Exchange Rate Bubbles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 219-251, May-June.
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    7. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    8. Shi, Shuping & Arora, Vipin, 2012. "An application of models of speculative behaviour to oil prices," Economics Letters, Elsevier, vol. 115(3), pages 469-472.
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    10. van Norden, Simon & Schaller, Huntley, 1993. "The Predictability of Stock Market Regime: Evidence from the Toronto Stock Exchange," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 505-510, August.
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    Cited by:

    1. Dirk G Baur & Kristoffer Glover, 2012. "A Gold Bubble?," Working Paper Series 175, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

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    More about this item

    Keywords

    Heterogenous agents; asset price; bubble; rational; regime switching;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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