Department of Economics and Business Economics

Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations

Research output: Working paper/Preprint Working paperResearch

Standard

Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations. / Pedersen, Thomas Quistgaard; Montes Schütte, Erik Christian.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2017.

Research output: Working paper/Preprint Working paperResearch

Harvard

Pedersen, TQ & Montes Schütte, EC 2017 'Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations' CREATES Research Papers, no. 2017-09, Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

Pedersen, T. Q., & Montes Schütte, E. C. (2017). Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations. Institut for Økonomi, Aarhus Universitet. CREATES Research Papers No. 2017-09

CBE

MLA

Pedersen, Thomas Quistgaard and Erik Christian Montes Schütte Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2017-09). 2017., 34 p.

Vancouver

Author

Pedersen, Thomas Quistgaard ; Montes Schütte, Erik Christian. / Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations. Aarhus : Institut for Økonomi, Aarhus Universitet, 2017. (CREATES Research Papers; No. 2017-09).

Bibtex

@techreport{11b6c6ba95d34ed7921896c507ffd6a0,
title = "Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations",
abstract = "We analyze an empirically important issue with the 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 more or less perfectly sized test statistics even in the presence of 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 less strong evidence of bubbles compared to existing evidence.",
keywords = "Right-tailed unit root tests, GSADF, Size and power properties, Sieve bootstrap, International housing market",
author = "Pedersen, {Thomas Quistgaard} and {Montes Sch{\"u}tte}, {Erik Christian}",
year = "2017",
month = feb,
day = "16",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2017-09",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations

AU - Pedersen, Thomas Quistgaard

AU - Montes Schütte, Erik Christian

PY - 2017/2/16

Y1 - 2017/2/16

N2 - We analyze an empirically important issue with the 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 more or less perfectly sized test statistics even in the presence of 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 less strong evidence of bubbles compared to existing evidence.

AB - We analyze an empirically important issue with the 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 more or less perfectly sized test statistics even in the presence of 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 less strong evidence of bubbles compared to existing evidence.

KW - Right-tailed unit root tests, GSADF, Size and power properties, Sieve bootstrap, International housing market

M3 - Working paper

T3 - CREATES Research Papers

BT - Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -