Testing for an Explosive Bubble using High-Frequency Volatility

H. Peter Boswijk (), Jun Yu and Yang Zu ()
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H. Peter Boswijk: Amsterdam School of Economics, University of Amsterdam
Yang Zu: Department of Economics, University of Macau

No 202402, Working Papers from University of Macau, Faculty of Business Administration

Abstract: Based on a continuous-time stochastic volatility model with a linear drift, we develop a test for explosive behavior in financial asset prices at a low frequency when prices are sampled at a higher frequency. The test exploits the volatility information in the high-frequency data. The method consists of devolatizing log-asset price increments with realized volatility measures and performing a supremumtype recursive Dickey-Fuller test on the devolatized sample. The proposed test has a nuisance-parameter-free asymptotic distribution and is easy to implement. We study the size and power properties of the test in Monte Carlo simulations. A realtime date-stamping strategy based on the devolatized sample is proposed for the origination and conclusion dates of the explosive regime. Conditions under which the real-time date-stamping strategy is consistent are established. The test and the date-stamping strategy are applied to study explosive behavior in cryptocurrency and stock markets.

Keywords: Stochastic volatility model; Unit root test; Double asymptotics; Explosiveness; Asset price bubbles (search for similar items in EconPapers)
JEL-codes: C12 C22 G01 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2024-06
New Economics Papers: this item is included in nep-cmp, nep-mst and nep-rmg
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Published in UM-FBA Working Paper Series

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Working Paper: Testing for an Explosive Bubble using High-Frequency Volatility (2024)
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