When bubbles burst: Econometric tests based on structural breaks

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  • J. Breitung, Institute of Econometrics, University of Bonn
  • ,
  • Robinson Kruse
Speculative bubbles have played an important role ever since in financial economics. During an ongoing bubble it is relevant for investors and policy-makers to know whether the bubble continues to grow or whether it is already collapsing. Prices are typically well approximated by a random walk in absence of bubbles, while periods of bubbles are characterised by explosive price paths. In this paper we first propose a conventional Chow-type testing procedure for a structural break from an explosive to a random walk regime. It is shown that under the null hypothesis of a mildly explosive process a suitably modified Chow-type statistic possesses a standard normal limiting distribution. Second, a monitoring procedure based on the CUSUM statistic is suggested. It timely indicates such a structural change. Asymptotic results are derived and small-sample properties are studied via Monte Carlo simulations. Finally, two empirical applications illustrate the merits and limitations of our suggested procedures.
TidsskriftStatistical Papers
Sider (fra-til)911-930
Antal sider20
StatusUdgivet - 1 nov. 2013

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