Bayesian Analysis of Bubbles in Asset Prices

Andras Fulop and Jun Yu
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Andras Fulop: Finance Department, ESSEC Business School, Paris-Singapore, Cergy-Pontoise 95021, CEDEX, France

Econometrics, 2017, vol. 5, issue 4, 1-23

Abstract: We develop a new model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic long run mean. The second regime reflects the bubble period with explosive behavior. Stochastic switches between two regimes and non-constant probabilities of exit from the bubble regime are both allowed. A Bayesian learning approach is employed to jointly estimate the latent states and the model parameters in real time. An important feature of our Bayesian method is that we are able to deal with parameter uncertainty and at the same time, to learn about the states and the parameters sequentially, allowing for real time model analysis. This feature is particularly useful for market surveillance. Analysis using simulated data reveals that our method has good power properties for detecting bubbles. Empirical analysis using price-dividend ratios of S&P500 highlights the advantages of our method.

Keywords: parameter learning; markov switching; MCMC; real time bubble detection (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Bayesian Analysis of Bubbles in Asset Prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecnmx:v:5:y:2017:i:4:p:47-:d:115992

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