Real-time monitoring of bubbles and crashes

Emily Whitehouse, D. I. Harvey and S. J. Leybourne
Additional contact information
D. I. Harvey: School of Economics, University of Nottingham
S. J. Leybourne: School of Economics, University of Nottingham

No 2022007, Working Papers from The University of Sheffield, Department of Economics

Abstract: Given the financial and economic damage that can be caused by the collapse of an asset price bubble, it is of critical importance to rapidly detect the onset of a crash once a bubble has been identified. We develop a real-time monitoring procedure for detecting a crash episode in a time series. We adopt an autoregressive framework, with the bubble and crash regimes modelled by explosive and stationary dynamics respectively. The first stage of our approach is to monitor for the presence of a bubble; conditional on having detected a bubble, we monitor for a crash in real time as new data emerges. Our crash detection procedure employs a statistic based on the different signs of the means of the first differences associated with explosive and stationary regimes, and critical values are obtained using a training period, over which no bubble or crash is assumed to occur. Monte Carlo simulations suggest that our recommended procedure has a well-controlled false positive rate during a bubble regime, while also allowing very rapid detection of a crash when one occurs. Application to the US housing market demonstrates the efficacy of our procedure in rapidly detecting the house price crash of 2006.

Keywords: Real-time monitoring; Bubble; Crash; Explosive autoregression; Stationary autoregression (search for similar items in EconPapers)
JEL-codes: C12 C22 G01 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2022-04
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ore and nep-ure
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Citations: View citations in EconPapers (1)

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https://www.sheffield.ac.uk/economics/research/serps First version, April 2022 (application/pdf)

Related works:
Journal Article: Real‐Time Monitoring of Bubbles and Crashes (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2022007

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