A Time-Varying Parameter Model for Local Explosions

Francisco Blasques (), Siem Jan Koopman and Marc Nientker ()
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Marc Nientker: VU Amsterdam

No 18-088/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Locally explosive behavior is observed in many economic and financial time series when bubbles are formed. We introduce a time-varying parameter model that is capable of describing this behavior in time series data. Our proposed model can be used to predict the emergence, existence and burst of bubbles. We adopt a flexible observation driven model specification that allows for different bubble shapes and behavior. We establish stationarity, ergodicity, and bounded moments of the data generated by our model. Furthermore, we obtain the consistency and asymptotic normality of the maximum likelihood estimator. Given the parameter estimates, our filter is capable of extracting the unobserved bubble process from observed data. We study finite-sample properties of our estimator through a Monte Carlo simulation study. Finally, we show that our model compares well with noncausal models in a financial application concerning the Bitcoin/US dollar exchange rate.

Keywords: bubbles; observation driven models; noncausal models; stationary; ergodic; consistency; asymptotic normality; exchange rates (search for similar items in EconPapers)
JEL-codes: C22 C58 G10 (search for similar items in EconPapers)
Date: 2018-11-16
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ore and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A time-varying parameter model for local explosions (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20180088

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