Nonlinearities and tests of asset price bubbles

Vipin Arora () and Shuping Shi

Empirical Economics, 2016, vol. 50, issue 4, No 12, 1433 pages

Abstract: Abstract We find that incorporating nonlinearities into tests of asset price bubbles has important consequences for the results. We show this by comparing four tests using S&P 500 data. Our results indicate that the modification which incorporates nonlinear probabilities outperforms the other models in terms of select information criteria and a likelihood-based test. In addition, the coefficients associated with the nonlinear terms have the expected sign and the estimated probabilities display larger movements during the late 1910s, early 1930s/1940s, and the 2000s.

Keywords: Regime switching; Bubble; Linear approximation; Nonlinear specification (search for similar items in EconPapers)
JEL-codes: C51 D84 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00181-015-0976-1

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