Fads or bubbles?

Simon van Norden () and Huntley Schaller

Empirical Economics, 2002, vol. 27, issue 2, 335-362

Abstract: This paper tests between fads and bubbles using a switching regression to distinguish between competing models. Two main features of the bubbles model distinguish it from the fads model. First, the bubbles model implies that returns are drawn from regimes which differ in the way returns vary with deviations from fundamental prices. Second, the bubbles model implies that deviations from fundamental price will help predict regime switches. Using US data for 1926-89, we find evidence which is consistent with the fads model even when we allow for variation in expected dividend growth rates and expected discount rates. However, the restrictions which the fads model implies for a more general switching-regression specification are rejected. The rejections point in the direction of the bubbles model, although not all of the implications of the bubbles model are supported by the data.

Keywords: macroeconomics and financial markets; fads; bubbles; time series econometrics; regime switching (search for similar items in EconPapers)
JEL-codes: C3 E3 G1 (search for similar items in EconPapers)
Date: 2002-04-26
Note: Received: October 2000/Final Version Received: October 2001
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: Fads or Bubbles? (1997)
Working Paper: Fads or Bubbles? (1995)
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