Testing for rational bubbles in a co-explosive vector autoregression

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  • Tom Engsted
  • Bent Nielsen, Nuffield College, Oxford, Storbritannien
  • Institut for Økonomi
We derive the parameter restrictions that a standard equity market
model implies for a bivariate vector autoregression for stock prices and dividends, and
we show how to test these restrictions using likelihood ratio tests. The restrictions,
which imply that stock returns are unpredictable, are derived both for a model without
bubbles and for a model with a rational bubble. In both cases we show how the
restrictions can be tested through standard chi-squared inference. The analysis for
the no-bubble case is done within the traditional Johansen model for I(1) variables,
while the bubble model is analysed using a co-explosive framework. The methodology
is illustrated using US stock prices and dividends for the period 1872-2000.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider54
StatusUdgivet - 2010

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