Publication Type

Working Paper

Version

publishedVersion

Publication Date

8-2011

Abstract

Identifying explosive bubbles that are characterized by periodically collapsing behavior over time has been a major concern in the literature and is of great importance for practitioners. The complexity of the nonlinear structure in multiple bubble phenomena diminishes the discriminatory power of existing tests, as evidenced in early simulations conducted by Evans (1991). Multiple collapsing bubble episodes within the same sample period make bubble diagnosis particularly difficult and complicate attempts at econometric dating. The present paper systematically investigates these issues and develops new procedures for practical implementation and surveillance strategies by central banks. We show how the testing procedure and dating algorithm of Phillips, Wu and Yu (2011, PWY) is affected by multiple bubbles and may fail to be consistent. To assist performance in such contexts, the present paper proposes a generalized version of the sup ADF test of PWY that addresses the difficulty. The asymptotic distribution of the generalized test is provided and the test is shown to significantly improve discriminatory power in simulations. The paper advances a new date-stamping strategy for the origination and termination of multiple bubbles that is based on this generalized test and consistency of the date-stamping algorithm is established. The new strategy leads to distinct power gains over the date-stamping strategy of PWY when multiple bubbles occur. Empirical applications are conducted with both tests along with their respective date-stamping technology to S&P 500 stock market data from January 1871 to December 2010. The new approach identifies many key historical episodes of exuberance and collapse over this period, whereas the strategy of PWY locates only two such episodes in the same sample range.

Keywords

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

Discipline

Econometrics | Finance

Research Areas

Econometrics

First Page

1

Last Page

66

Publisher

SMU Economics and Statistics Working Paper Series, No. 09-2011

City or Country

Singapore

Copyright Owner and License

Authors

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