Financialization and Speculative Bubbles - International Evidence

28 Pages Posted: 17 Jan 2017

See all articles by Ehsan Ahmed

Ehsan Ahmed

James Madison University - Economics Program

J. Barkley Rosser, Jr.

James Madison University - Economics Program

Jamshed Y. Uppal

Catholic University of America

Date Written: December 12, 2016

Abstract

Countries across the globe have undergone financialization of their economies over the recent decades. Concomitantly, asset markets have exhibited high levels of volatility with sharp increases characteristic of speculative bubbles followed by even sharper crashes. This paper attempts to test the possible presence of nonlinear speculative bubbles in 23 international markets using daily data from January 1993-March 2015, and its possible link to the financialization phenomenon. To estimate fundamental values, we estimate VAR models for each market for stock market returns with world interest rates, exchange rates, and world stock indexes as the fundamental variables. Residuals from these VAR national market models are tested for significant movements away from the fundamentals using Hamilton regime switching and Hurst rescaled range tests. After removing ARCH effects from the residuals the remaining series is tested for nonlinearities using BDS statistics. Our results indicate the presence of speculative bubbles in all 23 of these markets with increasing incidence over time, which suggest a linkage with the phenomenon of financialization of the economies over the period.

Keywords: bubbles, emerging markets, nonlinear speculation

Suggested Citation

Ahmed, Ehsan and Rosser, Jr., J. Barkley and Uppal, Jamshed Y., Financialization and Speculative Bubbles - International Evidence (December 12, 2016). CAMA Working Paper No. 6/2017 , Available at SSRN: https://ssrn.com/abstract=2899960 or http://dx.doi.org/10.2139/ssrn.2899960

Ehsan Ahmed

James Madison University - Economics Program ( email )

United States

J. Barkley Rosser, Jr. (Contact Author)

James Madison University - Economics Program ( email )

United States
540-568-3212 (Phone)
540-568-3010 (Fax)

Jamshed Y. Uppal

Catholic University of America ( email )

116 McMahon Hall
Washington, DC 20064
United States

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