Explosive Behavior in the 1990s Nasdaq: When did Exuberance Escalate Asset Values?

37 Pages Posted: 5 Jun 2009

See all articles by Peter C. B. Phillips

Peter C. B. Phillips

Yale University - Cowles Foundation; University of Auckland; University of Southampton; Singapore Management University - School of Economics

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Jun Yu

Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: June 3, 2009

Abstract

A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date-stamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides confirmation of explosiveness and date-stamps the origination of financial exuberance to mid-1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in financial markets, thereby giving the remark empirical content.

Keywords: explosive root, irrational exuberance, mildly explosive process, Nasdaq bubble, periodically collapsing bubble, sup test, unit root test

JEL Classification: G10, C22

Suggested Citation

Phillips, Peter C. B. and Wu, Yangru and Yu, Jun, Explosive Behavior in the 1990s Nasdaq: When did Exuberance Escalate Asset Values? (June 3, 2009). Cowles Foundation Discussion Paper No. 1699. Available at SSRN: https://ssrn.com/abstract=1413830 or http://dx.doi.org/10.2139/ssrn.1413830

Peter C. B. Phillips (Contact Author)

Yale University - Cowles Foundation ( email )

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Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

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HOME PAGE: http://www.mysmu.edu/faculty/yujun/

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