Sup-ADF-style bubble-detection methods under test

Verena Monschang and Bernd Wilfling

No 7819, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: In this paper we analyze the performance of supremum augmented Dickey-Fuller (SADF), generalized SADF (GSADF), and backward SADF (BSADF) tests, as introduced by Phillips et al. (International Economic Review 56:1043-1078, 2015) for detecting and date-stamping financial bubbles. In Monte Carlo simulations, we show that the SADF and GSADF tests may reveal substantial size distortions under typical financial-market characteristics (like the empirically well-documented leverage effect). We consider the rational bubble specification suggested by Rotermann and Wilfl ing (Applied Economics Letters 25:1091-1096, 2018) that is able to generate realistic stock-price dynamics (in terms of level trajectories and volatility paths). Simulating stock-price trajectories that contain these parametric bubbles, we demonstrate that the SADF and GSADF tests can have extremely low power under a wide range of bubble-parameter constellations. In an empirical analysis, we use NASDAQ data covering a time-span of 45 years and find that the outcomes of the bubble date-stamping procedure (based on the BSADF test) are sensitive to the data-frequency chosen by the econometrician.

Keywords: Stock markets; present-value model; rational bubble; explosiveness; SADF and GSADF tests; bubble detection; date-stamping (search for similar items in EconPapers)
JEL-codes: C15 C32 C58 G15 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2019-02
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.wiwi.uni-muenster.de/cqe/sites/cqe/fil ... r/cqe_wp_78_2019.pdf Version of February 2019 (application/pdf)

Related works:
Journal Article: Sup-ADF-style bubble-detection methods under test (2021)
Working Paper: Sup-ADF-style bubble detection methods under test (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cqe:wpaper:7819

Access Statistics for this paper

More papers in CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster Am Stadtgraben 9, 48143 Münster, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Susanne Deckwitz (05sude@wiwi.uni-muenster.de).