Testing for a rational bubble under long memory

Michael Frömmel and Robinson Kruse

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We analyze the time series properties of the S&P500 dividend-price ratio in the light of long memory, structural breaks and rational bubbles. We find an increase in the long memory parameter in the early 1990s by applying a recently proposed test by Sibbertsen and Kruse (2009). An application of the unit root test against long memory by Demetrescu et al. (2008) suggests that the pre-break data can be characterized by long memory, while the post-break sample contains a unit root. These results reconcile two empirical findings which were seen as contradictory so far: on the one hand they confirm the existence of fractional integration in the S&P500 log dividend-price ratio and on the other hand they are consistent with the existence of a rational bubble. The result of a changing memory parameter in the dividend-price ratio has an important implication for the literature on return predictability: the shift from a stationary dividend-price ratio to a unit root process in 1991 is likely to have caused the well-documented failure of conventional return prediction models since the 1990s.

Keywords: Rational bubbles; dividend-price ratio; fractional integration; changing persistence. (search for similar items in EconPapers)
JEL-codes: C12 C22 G12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2011-05
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Testing for a rational bubble under long memory (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:11/722

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