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  • Bubbles_PavlidisPP2016_IERaccepted

    Rights statement: This is the peer reviewed version of the following article: Pavlidis, E. G., Paya, I. and Peel, D. A. (2017), TESTING FOR SPECULATIVE BUBBLES USING SPOT AND FORWARD PRICES. International Economic Review, 58: 1191–1226. doi:10.1111/iere.12249 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/iere.12249/abstract This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.

    Accepted author manuscript, 514 KB, PDF-document

    Embargo ends: 28/11/19

    Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License

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Testing for speculative bubbles using spot and forward prices

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>11/2017
<mark>Journal</mark>International Economic Review
Issue number4
Volume58
Number of pages36
Pages (from-to)1191-1226
Publication statusPublished
Early online date28/11/17
Original languageEnglish

Abstract

The probabilistic structure of periodically collapsing bubbles creates a gap between future spot and forward (or futures) asset prices in small samples. By exploiting this fact, we use two econometric methods, namely, the recursive unit root method of Phillips, Shi, and Yu (2015a,b) and the rolling regression method of Fama (1984), for detecting bubbles. Both methods do not rely on a particular model of asset price determination, they are robust to an explosive root in the process for market fundamentals, and are accompanied by a date-stamping strategy. By applying these methods to the German mark-US dollar and British pound-US dollar exchange rates, we provide evidence in favor of speculative bubbles in the foreign exchange market during the interwar German hyperinflation, but not during the recent floating-rate period. A further application to the S&P 500 index supports the existence of speculative bubbles in the US equity market.

Bibliographic note

This is the peer reviewed version of the following article: Pavlidis, E. G., Paya, I. and Peel, D. A. (2017), TESTING FOR SPECULATIVE BUBBLES USING SPOT AND FORWARD PRICES. International Economic Review, 58: 1191–1226. doi:10.1111/iere.12249 which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/iere.12249/abstract This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.