A Three-Regime Model of Speculative Behaviour: Modelling the Evolution of the S&P 500 Composite Index
University of Reading - ICMA Centre
Albourne Partners Limited
Economic Journal, Vol. 115, No. 505, pp. 767-797, July 2005
We examine whether a three-regime model that allows for dormant, explosive and collapsing speculative behaviour can explain the dynamics of the S&P 500. We extend existing models of speculative behaviour by including a third regime that allows a bubble to grow at a steady rate, and propose abnormal volume as an indicator of the probable time of bubble collapse. We also examine the financial usefulness of the three-regime model by studying a trading rule formed using inferences from it, whose use leads to higher Sharpe ratios and end of period wealth than from employing existing models or a buy-and-hold strategy.
Number of Pages in PDF File: 31Accepted Paper Series
Date posted: July 22, 2005
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