A time-varying parameter model for local explosions

Francisco Blasques, Siem Jan Koopman and Marc Nientker

Journal of Econometrics, 2022, vol. 227, issue 1, 65-84

Abstract: Financial and economic time series can feature locally explosive behaviour when bubbles are formed. We develop a time-varying parameter model that is capable of describing this behaviour in time series data. Our proposed dynamic 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 behaviour. 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 in the model, the implied filter is capable of extracting the unobserved bubble process from the 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 existing noncausal models in a financial application concerning the Bitcoin/US dollar exchange rate.

Keywords: Speculative bubble; Explosive processes; Invertibility; Consistency; Asymptotic normality (search for similar items in EconPapers)
JEL-codes: C13 C22 C58 G11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:227:y:2022:i:1:p:65-84

DOI: 10.1016/j.jeconom.2021.05.008

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