Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500

46 Pages Posted: 18 Sep 2013

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

Shuping Shi

Department of Economics, Macquarie University

Jun Yu

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 7, 2013

Abstract

Recent work on econometric detection mechanisms has shown the effectiveness of recursive procedures in identifying and dating financial bubbles. These procedures are useful as warning alerts in surveillance strategies conducted by central banks and fiscal regulators with real time data. Use of these methods over long historical periods presents a more serious econometric challenge due to the complexity of the nonlinear structure and break mechanisms that are inherent in multiple bubble phenomena within the same sample period. To meet this challenge the present paper develops a new recursive flexible window method that is better suited for practical implementation with long historical time series. The method is a generalized version of the sup ADF test of Phillips, Wu and Yu (2011, PWY) and delivers a consistent date-stamping strategy for the origination and termination of multiple bubbles. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. An empirical application of the methodology is conducted on S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach successfully identifies the well-known historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and a related CUSUM dating procedure locate far fewer episodes in the same sample range.

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

JEL Classification: C15, C22

Suggested Citation

Phillips, Peter C. B. and Shi, Shuping and Yu, Jun, Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500 (August 7, 2013). Cowles Foundation Discussion Paper No. 1914; FIRN Research Paper. Available at SSRN: https://ssrn.com/abstract=2327609 or http://dx.doi.org/10.2139/ssrn.2327609

Peter C. B. Phillips (Contact Author)

Yale University - Cowles Foundation ( email )

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Singapore Management University - School of Economics

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Shuping Shi

Department of Economics, Macquarie University ( email )

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Jun Yu

Singapore Management University ( email )

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Singapore Management University - Lee Kong Chian School of Business ( email )

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