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Statistical Papers

, Volume 54, Issue 4, pp 911–930 | Cite as

When bubbles burst: econometric tests based on structural breaks

  • Jörg BreitungEmail author
  • Robinson Kruse
Regular Article

Abstract

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.

Keywords

Speculative bubbles Structural breaks Mildly explosive processes Monitoring 

JEL Classification

C12 (Hypothesis Testing) C22 (Time-Series Models) G10 (General Financial Markets) 

Notes

Acknowledgments

We would like to thank an anonymous referee and a Guest Editor for their helpful comments. Robinson Kruse gratefully acknowledges financial support from CREATES funded by the Danish National Research Foundation.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Department of EconomicsInstitute of Econometrics, University of BonnBonnGermany
  2. 2.Institute for StatisticsSchool of Economics and Management, Leibniz University HannoverHannoverGermany
  3. 3.CREATES, School of Economics and Management, Aarhus UniversityAarhus CDenmark

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