Recursive right-tailed unit root tests for an explosive asset price bubble

Harvey, David I.; Leybourne, Stephen J.; Sollis, Robert

Abstract

In this article, we compare the local asymptotic and finite sample power of two recently proposed recursive right-tailed Dickey–Fuller-type tests for an explosive rational bubble in asset prices. It is shown that the power of the two tests can differ substantially depending on the location of the explosive regime, and whether such a regime ends in collapse. Since this information is typically unknown to the practitioner, we propose a union of rejections strategy that combines inference from the two individual tests. We find that, for a given specification of the explosive regime, the union of rejections strategy always attains power close to the better of the individual tests considered. An empirical illustration using the Nasdaq composite price index is also provided.

Citation

Harvey, D. I., Leybourne, S. J., & Sollis, R. (2015). Recursive right-tailed unit root tests for an explosive asset price bubble. Journal of Financial Econometrics, 13(1), https://doi.org/10.1093/jjfinec/nbt025

• Journal Article Type: Article
• Publication Date: Jan 1, 2015
• Deposit Date: Apr 6, 2016
• Publicly Available Date: Apr 6, 2016
• Journal: Journal of Financial Econometrics
• Print ISSN: 1479-8409
• Electronic ISSN: 1479-8417
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 13
• Issue: 1
• DOI: https://doi.org/10.1093/jjfinec/nbt025
• Keywords: Rational bubble; Explosive autoregression; Unit root testing
• Public URL: https://nottingham-repository.worktribe.com/output/988385
• Publisher URL: http://jfec.oxfordjournals.org/content/13/1/166
• Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Journal of Financial Econometrics following peer review. The version of record Havey, D.I., Leybourne, S.J., Sollis, R. (2015) Recursive right-tailed unit root tests for an explosive asset price bubble, 13(1) 166-187, is available online at: http://jfec.oxfordjournals.org/content/13/1/166.