Determination of periodically collapsing rational bubbles
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Since Evans’ criticism of conventional unit root and cointegration tests in case of periodically collapsing rational bubbles, a number of new approaches have been suggested. In this paper, we propose a new testing strategy to overcome the detection problem of periodically collapsing rational bubbles. Our method is based on Threshold Autoregressive Stochastic Unit Root Models. Monte Carlo simulations show that the proposed testing strategy is successful at the detection of bubbles introduced in Evans (1991). Besides having detection power, we are able to estimate threshold level and probability of collapse of bubbles. The empirical findings for US stock price in the 1871-2004 period are in favor of existence of bubbles.