Stock Market Volatility and Multi-Scale Positive and Negative Bubbles

Rangan Gupta, Jacobus Nel (), Joshua Nielsen () and Christian Pierdzioch
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Jacobus Nel: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa
Joshua Nielsen: Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO, 80302, USA

No 202310, Working Papers from University of Pretoria, Department of Economics

Abstract: We study whether booms and busts in the stock market of the United States (US) drives its volatility. Given this, first, we employ the Multi-Scale Log-Periodic Power Law Singularity Confidence Indicator (MS-LPPLS-CI) approach to identify both positive and negative bubbles in the short-, medium, and long-term. We successfully detect major crashes and rallies during the weekly period from January 1973 to December 2020. Second, we utilize a nonparametric causality-in-quantiles approach to analyze the predictive impact of our bubble indicators on daily data-based weekly realized volatility (RV). This econometric framework allows us to circumvent potential misspecification due to nonlinearity and instability, rendering the results of weak causal influence derived from a linear framework invalid. The MS-LPPLS-CIs reveal strong evidence of predictability for RV over its entire conditional distribution. We observe relatively stronger impacts for the positive bubbles indicators, with our findings being robust to an alternative metric of volatility, namely squared returns, and weekly realized volatilities derived from 5 (RV5)- and 10 (RV10)-minutes interval intraday data. Furthermore, we detect evidence of predictability for RV5 and RV10 of nine other developed and emerging stock markets. Finally, we also find strong evidence of causal feedbacks from RV5 and RV10 on to the MS-LPPLS-CIs of the 10 countries considered. Our findings have significant implications for investors and policymakers.

Keywords: Multi-Scale Positive and Negative Bubbles; Realized Volatility; Nonparametric Causality-in-Quantiles Test; International Stock Markets (search for similar items in EconPapers)
JEL-codes: C22 G15 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2023-05
New Economics Papers: this item is included in nep-des, nep-fmk and nep-inv
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202310

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