Financial bubble implosion and reverse regression
Financial bubble implosion and reverse regression
Expansion and collapse are two key features of a financial asset bubble. Bubble expansion may be modeled using a mildly explosive process. Bubble implosion may take several different forms depending on the nature of the collapse and therefore requires some flexibility in modeling. This paper first strengthens the theoretical foundation of the real time bubble monitoring strategy proposed in Phillips, Shi and Yu (2015a,b, PSY) by developing analytics and studying the performance characteristics of the testing algorithm under alternative forms of bubble implosion which capture various return paths to market normalcy. Second, we propose a new reverse sample use of the PSY procedure for detecting crises and estimating the date of market recovery. Consistency of the dating estimators is established and the limit theory addresses new complications arising from the alternative forms of bubble implosion and the endogeneity effects present in the reverse regression. A real-time version of the strategy is provided that is suited for practical implementation. Simulations explore the finite sample performance of the strategy for dating market recovery. The use of the PSY strategy for bubble monitoring and the new procedure for crisis detection are illustrated with an application to the Nasdaq stock market.
705-753
Phillips, Peter C.B.
f67573a4-fc30-484c-ad74-4bbc797d7243
Shi, Shu Ping
63bf055a-7921-4d96-9565-fdebd1172c1a
1 August 2018
Phillips, Peter C.B.
f67573a4-fc30-484c-ad74-4bbc797d7243
Shi, Shu Ping
63bf055a-7921-4d96-9565-fdebd1172c1a
Phillips, Peter C.B. and Shi, Shu Ping
(2018)
Financial bubble implosion and reverse regression.
Econometric Theory, 34 (4), .
(doi:10.1017/S0266466617000202).
Abstract
Expansion and collapse are two key features of a financial asset bubble. Bubble expansion may be modeled using a mildly explosive process. Bubble implosion may take several different forms depending on the nature of the collapse and therefore requires some flexibility in modeling. This paper first strengthens the theoretical foundation of the real time bubble monitoring strategy proposed in Phillips, Shi and Yu (2015a,b, PSY) by developing analytics and studying the performance characteristics of the testing algorithm under alternative forms of bubble implosion which capture various return paths to market normalcy. Second, we propose a new reverse sample use of the PSY procedure for detecting crises and estimating the date of market recovery. Consistency of the dating estimators is established and the limit theory addresses new complications arising from the alternative forms of bubble implosion and the endogeneity effects present in the reverse regression. A real-time version of the strategy is provided that is suited for practical implementation. Simulations explore the finite sample performance of the strategy for dating market recovery. The use of the PSY strategy for bubble monitoring and the new procedure for crisis detection are illustrated with an application to the Nasdaq stock market.
Text
BubbleImplosion_Mar2017
- Accepted Manuscript
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Accepted/In Press date: 24 February 2017
e-pub ahead of print date: 7 June 2017
Published date: 1 August 2018
Identifiers
Local EPrints ID: 422399
URI: http://eprints.soton.ac.uk/id/eprint/422399
ISSN: 0266-4666
PURE UUID: 43182eab-2aa9-4cbf-97dd-46d8d168e63b
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Date deposited: 23 Jul 2018 16:30
Last modified: 16 Mar 2024 06:50
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Author:
Shu Ping Shi
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