Testing for Multiple Bubbles: Historical Episodes of Exuberance and Collapse in the S&P 500

Peter Phillips, Shu-Ping Shi and Jun Yu
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Shu-Ping Shi: Australian National University

No 1914, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Recent work on econometric detection mechanisms has shown the effectiveness of recursive procedures in identifying and dating financial bubbles. These procedures are useful as warning alerts in surveillance strategies conducted by central banks and fiscal regulators with real time data. Use of these methods over long historical periods presents a more serious econometric challenge due to the complexity of the nonlinear structure and break mechanisms that are inherent in multiple bubble phenomena within the same sample period. To meet this challenge the present paper develops a new recursive flexible window method that is better suited for practical implementation with long historical time series. The method is a generalized version of the sup ADF test of Phillips, Wu and Yu (2011, PWY) and delivers a consistent date-stamping strategy for the origination and termination of multiple bubbles. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. An empirical application of the methodology is conducted on S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach successfully identifies the well-known historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and a related CUSUM dating procedure locate far fewer episodes in the same sample range.

Keywords: Date-stamping strategy; Flexible window; Generalized sup ADF test; Multiple bubbles; Rational bubble; Periodically collapsing bubbles; Sup ADF test (search for similar items in EconPapers)
JEL-codes: C15 C22 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-09
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk, nep-his, nep-rmg and nep-sea
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Citations: View citations in EconPapers (86)

Published in International Economic Review (November 2015), 56(4): 1043-1078

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Related works:
Journal Article: TESTING FOR MULTIPLE BUBBLES: HISTORICAL EPISODES OF EXUBERANCE AND COLLAPSE IN THE S&P 500 (2015)
Working Paper: Testing for Multiple Bubbles 1: Historical Episodes of Exuberance and Collapse in the S&P 500 (2013)
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