Some Econometric Results for the Blanchard-Watson Bubble Model

Soren Johansen, Theis Lange

Publikation: Working paper/Preprint Working paperForskning

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The purpose of the present paper is to analyse a simple bubble model suggested by Blanchard and Watson. The model is defined by y(t) =s(t)¿y(t-1)+e(t), t=1,…,n, where s(t) is an i.i.d. binary variable with p=P(s(t)=1), independent of e(t) i.i.d. with mean zero and finite variance. We take ¿>1 so the process is explosive for a period and collapses when s(t)=0. We apply the drift criterion for non-linear time series to show that the process is geometrically ergodic when p<1, because of the recurrent collapse. It has a finite mean if p¿<1, and a finite variance if p¿²<1. The question we discuss is whether a bubble model with infinite variance can create the long swings, or persistence, which are observed in many macro variables. We say that a variable is persistent if its autoregressive coefficient ¿(n) of y(t) on y(t-1), is close to one. We show that the estimator of ¿(n) converges to ¿p, if the variance is finite, but if the variance of y(t) is infinite, we prove the curious result that the estimator converges to ¿¿¹. The proof applies the notion of a tail index of sums of positive random variables with infinite variance to find the order of magnitude of the product moments of y(t).
Antal sider9
StatusUdgivet - 2011
Udgivet eksterntJa