Dating the Timeline of Financial Bubbles during the Subprime Crisis

Peter Phillips and Jun Yu

No 1770, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: A new recursive regression methodology is introduced to analyze the bubble characteristics of various financial time series during the subprime crisis. The methods modify a technique proposed in Phillips, Wu and Yu (2010) and provide a technology for identifying bubble behavior and consistent dating of their origination and collapse. The tests also serve as an early warning diagnostic of bubble activity. Seven relevant financial series are investigated, including three financial assets (the Nasdaq index, home price index and asset-backed commercial paper), two commodities (the crude oil price and platinum price), one bond rate (Baa), and one exchange rate (Pound/USD). Statistically significant bubble characteristics are found in all of these series. The empirical estimates of the origination and collapse dates suggest an interesting migration mechanism among the financial variables: a bubble first emerged in the equity market during mid-1995 lasting to the end of 2000, followed by a bubble in the real estate market between January 2001 and July 2007 and in the mortgage market between November 2005 and August 2007. After the subprime crisis erupted, the phenomenon migrated selectively into the commodity market and the foreign exchange market, creating bubbles which subsequently burst at the end of 2008, just as the effects on the real economy and economic growth became manifest. Our empirical estimates of the origination and collapse dates match well with the general datetimes of this crisis put forward in a recent study by Caballero, Farhi and Gourinchas (2008).

Keywords: Financial bubbles; Crashes; Date stamping; Explosive behavior; Mildly explosive process; Subprime crisis; Timeline (search for similar items in EconPapers)
JEL-codes: C12 C15 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010-09
New Economics Papers: this item is included in nep-ets, nep-sea and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Published in Quantitative Economics (November 2010), 1(2): 455-491

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Related works:
Journal Article: Dating the timeline of financial bubbles during the subprime crisis (2011)
Working Paper: Dating the Timeline of Financial Bubbles During the Subprime Crisis (2009)
Working Paper: Dating the Timeline of Financial Bubbles During the Subprime Crisis (2009)
Working Paper: Dating the Timeline of Financial Bubbles During the Subprime Crisis (2009)
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