Signaling Asset Price Bubbles with Time-Series Methods
Bank of Finland - Financial Stability and Statistics
February 2, 2012
Bank of Finland Research Discussion Paper No. 7/2012
This paper provides an early warning indicator for bubbles in financial markets. The indicator is based on traditional unit root tests, more precisely on the augmented Dickey-Fuller test and may be used in a repeated manner with rolling samples. The performance of the indicator is tested extensively via Monte Carlo simulations and comparisons of the results with the most powerful standard (stability) tests. The new indicator seems to be more robust and to have more power than the standard tests. In empirical application to US stock market data for 1871–2010, the new indicator signals most of the consensus bubbles and gives warning signals well ahead of the crash, in most cases as early as 12 months ahead. The indicator also signals most of the 'negative bubbles' before their turning points.
Number of Pages in PDF File: 50
Keywords: asset prices, financial crises, bubbles, indicator, unit-root
JEL Classification: G12, C15, G01working papers series
Date posted: February 11, 2012
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.328 seconds