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

Lookup NU author(s): Professor Robert Sollis

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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.

Publication metadata

Author(s): Harvey D, Leybourne SJ, Sollis R

Publication type: Article

Publication status: Published

Journal: Journal of Financial Econometrics

Year: 2015

Volume: 13

Issue: 1

Pages: 166-187

Print publication date: 01/01/2015

Online publication date: 02/12/2013

Acceptance date: 01/01/1900

Date deposited: 22/02/2018

ISSN (print): 1479-8409

ISSN (electronic): 1479-8417

Publisher: Oxford University Press

URL: http://dx.doi.org/10.1093/jjfinec/nbt025

DOI: 10.1093/jjfinec/nbt025

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