Emily Whitehouse

Location
A45 Sir Clive Granger Building
Date(s)
Monday 13th November 2017 (13:00-14:00)
Description

Explosive asset price bubble detection with unknown bubble duration and initial condition

Abstract: Recent research has proposed a method of detecting explosive processes that is based on forward recursions of OLS, right-tailed, Dickey-Fuller [DF] unit root tests. In this paper an alternative approach using GLS DF tests is considered. We derive limiting distributions for both mean-invariant and trend-invariant versions of OLS and GLS variants of the Phillips, Wu and Yu (2011) [PWY] test statistic under a temporary, locally explosive alternative. These limits are dependent on both the value of the initial condition and the start and end points of the temporary explosive regime. Local asymptotic power simulations show that a GLS version of the PWY statistic offers superior power when a large proportion of the data is explosive, but that the OLS approach is preferred for explosive periods of short duration. These power differences are magnified by the presence of an asymptotically non-negligible initial condition. We propose a union of rejections procedure that capitalises on the respective power advantages offered by both OLS and GLS based approaches. This procedure achieves power close to the effective envelope provided by the two individual PWY tests across all settings of the initial value and lengths of the explosive period considered in this paper. We show that these results are also robust to the point in the sample at which the explosive regime occurs. An application of the union procedure to NASDAQ daily prices confirms the empirical value of this testing strategy.

Paper (.pdf)

School of Economics

Sir Clive Granger Building
University of Nottingham
University Park
Nottingham, NG7 2RD

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