Publication Type

Working Paper

Publication Date

8-2013

Abstract

Recent work on econometric detection mechanisms has shown the e¤ectiveness of recur- sive procedures in identifying and dating …nancial bubbles. These procedures are useful as warning alerts in surveillance strategies conducted by central banks and …scal regulators with real time data. Use of these methods over long historical periods presents a more serious econometric challenge due to the complexity of the nonlinear structure and break mecha- nisms that are inherent in multiple bubble phenomena within the same sample period. To meet this challenge the present paper develops a new recursive ‡exible window method that is better suited for practical implementation with long historical time series. The method is a generalized version of the sup ADF test of Phillips, Wu and Yu (2011, PWY) and de- livers a consistent date-stamping strategy for the origination and termination of multiple bubbles. Simulations show that the test signi…cantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. An empirical application of the methodology is conducted on S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach successfully identi…es the well-known historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and a related CUSUM dating procedure locate far fewer episodes in the same sample range.

Keywords

Date-stamping strategy, Flexible window, Generalized sup ADF test, Multiple bubbles, Rational bubble, Periodically collapsing bubbles, Sup ADF test

Discipline

Economics

Research Areas

Econometrics

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Included in

Economics Commons

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