Department of Economics and Business Economics

Testing for rational bubbles in a co-explosive vector autoregression

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  • Rp10 25

    Final published version, 436 KB, PDF document

  • Tom Engsted
  • Bent Nielsen, Nuffield College, Oxford, United Kingdom
  • School of Economics and Management
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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages54
Publication statusPublished - 2010

    Research areas

  • Rational bubbles, Explosiveness and co-explosiveness, Cointegration, Vector autoregression, Likelihood ratio tests

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