A Three-Regime Model of Speculative Behaviour: Modelling the Evolution of the S&P 500 Composite Index

Chris Brooks and Apostolos Katsaris

Economic Journal, 2005, vol. 115, issue 505, 767-797

Abstract: We examine whether a three-regime model that allows for dormant, explosive and collapsing speculative behaviour can explain the dynamics of the S&P 500. We extend existing models of speculative behaviour by including a third regime that allows a bubble to grow at a steady rate, and propose abnormal volume as an indicator of the probable time of bubble collapse. We also examine the financial usefulness of the three-regime model by studying a trading rule formed using inferences from it, whose use leads to higher Sharpe ratios and end of period wealth than from employing existing models or a buy-and-hold strategy. Copyright 2005 Royal Economic Society.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:econjl:v:115:y:2005:i:505:p:767-797

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