Research Discussion Papers, Bank of Finland
No 7/2012:
Signaling asset price bubbles with time-series methods
Katja Taipalus ()
Abstract: This paper provides an early warning indicator for bubbles
in financial markets. The indicator is based on traditional unit root
tests, more precisely on the augmented Dickey-Fuller test and may be used
in a repeated manner with rolling samples. The performance of the indicator
is tested extensively via Monte Carlo simulations and comparisons of the
results with the most powerful standard (stability) tests. The new
indicator seems to be more robust and to have more power than the standard
tests. In empirical application to US stock market data for 1871–2010, the
new indicator signals most of the consensus bubbles and gives warning
signals well ahead of the crash, in most cases as early as 12 months ahead.
The indicator also signals most of the 'negative bubbles' before their
turning points.
Keywords: asset prices; financial crises; bubbles; indicator; unit-root; (follow links to similar papers)
JEL-Codes: C15; G01; G12; (follow links to similar papers)
48 pages, February 2, 2012
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