Testing for periodically collapsing rational speculative bubbles in US REITs

Keith Anderson, Chris Brooks and Sotiris Tsolacos
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Keith Anderson: University of York
Sotiris Tsolacos: Property and Portfolio Research

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: This paper is the first to utilize a direct test for periodic, partially collapsing speculative bubbles in US REIT prices. A long history of data is employed for the All, Mortgage and Equity REIT categories. This approach is more powerful than existing tests and is based on the formulation of a switching model that has a surviving regime where the bubble continues to grow and a collapsing regime where the bubble implodes. There is some evidence for the presence of speculative bubbles, most notably in the Mortgage REITs series. There is also visual evidence of a negative bubble in all three series in the early 1970s and of a positive bubble after 2000 which subsequently burst. We are able to compute the time-varying probabilities of being in the surviving and collapsing regimes, and through this to estimate a probability that the bubble will burst during the following period. We show how this information may be used in developing a signal to inform investors' decisions on timing an exit from the market, thereby shielding their portfolios from the effects of periodically bursting bubbles or indeed taking advantage of such bubbles.

Keywords: REITs; periodic partially collapsing speculative bubbles; direct bubble tests; probability of collapse; trading signals (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2009-09
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Related works:
Journal Article: Testing for Periodically Collapsing Rational Speculative Bubbles in U.S. REITs (2011)
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