Speculative bubbles in present-value models: A Bayesian Markov-switching state space approach

Joshua Chan and Caterina Santi

Journal of Economic Dynamics and Control, 2021, vol. 127, issue C

Abstract: We estimate the dynamics of a speculative bubble subject to a surviving and a collapsing regime together with the dynamics of dividends and returns in a tractable state space specification of the present-value model. To estimate this new high-dimensional model, we develop an efficient Markov chain Monte Carlo sampler to simulate from the joint posterior distribution. We find that real-world stock price bubbles show significant Markov-switching structure. Further, the results indicate that dividend growth rates are highly predictable. Finally, we find that bubble variation explains a large share of the variation in the price-dividend ratio and unexpected return.

Keywords: Rational bubbles; Present-value model; Markov-switching model; State space model; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C32 G12 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:127:y:2021:i:c:s0165188921000361

DOI: 10.1016/j.jedc.2021.104101

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