Multiple Changes in Persistence vs. Explosive Behaviour: The Dotcom Bubble
11 Pages Posted: 5 Apr 2012 Last revised: 22 May 2012
Date Written: April 5, 2012
Based on a method developed by Laybourne, Kim and Taylor (2007) for detecting multiple changes in persistence, we test for changes in persistence in the dividend-price ratio of the Nasdaq stocks. The results confirm the existence of the so-called Dotcom bubble around the last turn of the century and its start and end dates. Furthermore, we compare the results with a test for detecting and date-stamping explosive unit-root behaviour developed by Phillips, Wu and Yu’s (2011) also applied to the Nasdaq price and dividend indices. We find that Laybourne, Kim and Taylor’s test is capable of detecting the Dotcom bubble as much as Phillips, Wu and Yu’s test is, but there are significant differences between the bubble start and end dates suggested by both methods and between these and the dates reported by the financial media. We also find an unexpected negative bubble extending from the beginning of the 1970s to the beginning of the 1990s where the Nasdaq stock prices were below their fundamental values as indicated by their dividend yields, which has not been reported in the literature so far.
Keywords: Multiple changes in persistence, Explosive behaviour, Unit roots, Dotcom Bubble, Nasdaq
JEL Classification: C10, C12, C20, C22, C52, G2, G10, G12, G14, G15, G17
Suggested Citation: Suggested Citation