Rational Expectation Bubbles: Evidence from Hong Kong's Sub-Indices

Abstract

This paper uses Hong Kong stock market’s four sub-indices to examine the existence and causes of rational expectation bubbles. The unit root test is applied to the rational bubble hypothesis. Various causality test methods are used to examine the causality of bubble among the four sub-indices. The empirical results show that in the sub-periods of 1986-2002 and 2000-2012, the bubbles of Commerce & Industry and Utilities industries are consistent with rational expectation bubbles, but not so in the Finance and Properties industries. In general, the rational expectation bubbles in the two sub-periods seemed to have caused by expectations in other growing foreign economies.

Keywords: rational expectation; stock price bubbles; causality; foreign markets

JEL Classification: G12, C50