Scientific Monographs, Bank of Finland
Bubbles in the Finnish and US equities markets
Abstract: Tests for unit roots in log dividend yields, which are
consistent with ‘rational bubbles’ in stock prices, are conducted for the
S&P500 and Finnish stock market indexes. In addition to the traditional
unit root tests, we split the data into 10-year segments and use frequency
domain analysis to test for the presence of unit roots in the dividend
yield data. The results strongly suggest the existence of bubbles in both
the US and Finnish markets. Finally we develop a novel dividend yield-based
method to track periods when stock prices divert their fundamental levels.
This indicator produces promising results, as it seems to have some
forecasting ability concerning booms and busts in the stock markets.
Keywords: equity price; bubble; rolling ADF; (follow links to similar papers)
JEL-Codes: G12; (follow links to similar papers)
128 pages, August 29, 2006
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