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Testing for explosive bubbles in the presence of autocorrelated innovations

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Testing for explosive bubbles in the presence of autocorrelated innovations. / Pedersen, Thomas Quistgaard; Schütte, Erik Christian Montes.

In: Journal of Empirical Finance, Vol. 58, 09.2020, p. 207-225.

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@article{00a61794834a481a8e751841a26e2b99,
title = "Testing for explosive bubbles in the presence of autocorrelated innovations",
abstract = "We analyze an empirically important issue with recursive right-tailed unit root tests for bubbles in asset prices. First, we show that serially correlated innovations, which is a feature that is present in most financial series used to test for bubbles, can lead to severe size distortions when using either fixed or automatic (based on information criteria) lag-length selection in the auxiliary regressions underlying the test. Second, we propose a sieve-bootstrap version of these tests and show that this results in tests which control size well across a number of simulation designs both with and without highly autocorrelated innovations. We also find that these improvements in size come at a relatively low cost for the power of the tests. Finally, we apply the bootstrap tests on the housing market of OECD countries, and generally find much weaker evidence of housing bubbles compared to existing evidence.",
keywords = "GSADF, International housing market, Right-tailed unit root tests, SADF, Sieve bootstrap, Size and power properties",
author = "Pedersen, {Thomas Quistgaard} and Sch{\"u}tte, {Erik Christian Montes}",
year = "2020",
month = sep,
doi = "10.1016/j.jempfin.2020.06.002",
language = "English",
volume = "58",
pages = "207--225",
journal = "Journal of Empirical Finance",
issn = "0927-5398",
publisher = "Elsevier BV",

}

RIS

TY - JOUR

T1 - Testing for explosive bubbles in the presence of autocorrelated innovations

AU - Pedersen, Thomas Quistgaard

AU - Schütte, Erik Christian Montes

PY - 2020/9

Y1 - 2020/9

N2 - We analyze an empirically important issue with recursive right-tailed unit root tests for bubbles in asset prices. First, we show that serially correlated innovations, which is a feature that is present in most financial series used to test for bubbles, can lead to severe size distortions when using either fixed or automatic (based on information criteria) lag-length selection in the auxiliary regressions underlying the test. Second, we propose a sieve-bootstrap version of these tests and show that this results in tests which control size well across a number of simulation designs both with and without highly autocorrelated innovations. We also find that these improvements in size come at a relatively low cost for the power of the tests. Finally, we apply the bootstrap tests on the housing market of OECD countries, and generally find much weaker evidence of housing bubbles compared to existing evidence.

AB - We analyze an empirically important issue with recursive right-tailed unit root tests for bubbles in asset prices. First, we show that serially correlated innovations, which is a feature that is present in most financial series used to test for bubbles, can lead to severe size distortions when using either fixed or automatic (based on information criteria) lag-length selection in the auxiliary regressions underlying the test. Second, we propose a sieve-bootstrap version of these tests and show that this results in tests which control size well across a number of simulation designs both with and without highly autocorrelated innovations. We also find that these improvements in size come at a relatively low cost for the power of the tests. Finally, we apply the bootstrap tests on the housing market of OECD countries, and generally find much weaker evidence of housing bubbles compared to existing evidence.

KW - GSADF

KW - International housing market

KW - Right-tailed unit root tests

KW - SADF

KW - Sieve bootstrap

KW - Size and power properties

UR - http://www.scopus.com/inward/record.url?scp=85086792398&partnerID=8YFLogxK

U2 - 10.1016/j.jempfin.2020.06.002

DO - 10.1016/j.jempfin.2020.06.002

M3 - Journal article

AN - SCOPUS:85086792398

VL - 58

SP - 207

EP - 225

JO - Journal of Empirical Finance

JF - Journal of Empirical Finance

SN - 0927-5398

ER -