Speculative Bubbles in Segmented Markets

Efthymios Pavlidis and Kostas Vasilopoulos ()

No 268640661, Working Papers from Lancaster University Management School, Economics Department

Abstract: We propose a novel approach for testing for rational speculative bubbles in segmented capital markets. The basic idea is that, under capital controls, heterogeneity of speculative expectations across international equity markets causes financial assets with identical cash flow promises to trade at different prices. Because these deviations from the law of one price inherit the properties of the speculative bubble process, they display periods of explosive dynamics and have predictive power for future movements in equity prices in sample. These two hypotheses can be examined empirically using sequential unit root tests and predictive regressions. An attractive feature of this approach for bubble detection is that it does not require the specification of a model for market fundamentals, thus mitigating the well-known joint hypothesis problem. The focus of the paper is on mainland Chinese companies that cross list shares in Hong Kong. China is an ideal setting for our analysis because of the significant restrictions on capital movements imposed by the authorities and the turbulent behaviour of its stock market over the last decades.

Keywords: speculative bubbles; law of one price; AH premium; recursive unit root tests; predictive regressions (search for similar items in EconPapers)
JEL-codes: C22 C32 G15 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-fmk and nep-ore
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.lancaster.ac.uk/media/lancaster-univers ... casterWP2019_014.pdf (application/pdf)

Related works:
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:lan:wpaper:268640661

Access Statistics for this paper

More papers in Working Papers from Lancaster University Management School, Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Giorgio Motta ().