Searching for rational bubble footprints in the Singaporean and Indonesian stock markets


We re-examine the presence of rational speculative bubbles in the Singaporean and Indonesian stock markets in light of contradictory results in the literature. We employ a mix of descriptive statistics, explosiveness tests and duration dependence tests for an expanded dataset from 1970 to 2013 that covers at least two suspected bubble episodes - the 1997 Asian Financial Crisis (AFC) and the Global Financial Crisis (GFC). We find bubble footprints in Singapore and Indonesia using descriptive statistics and explosiveness tests. However, we find no evidence of rational bubbles in Singapore using the duration dependence test. On the other hand, in Indonesia we find evidence of rational bubbles in weekly but not in monthly data. Our results indicate that the duration dependence test could be sensitive to data frequency suggesting that the duration dependence test results are not always conclusive and that it should be used in conjunction with other tests.

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  1. 1.

    McQueen and Thorley (1994, p.379) define a rational bubble as one where “the probability of a high return exactly compensates investors for the probability of a crash”.

  2. 2.

    ASEAN stands for Association of Southeast Asian Nations. The other member states of the ASEAN are Thailand, Malaysia, Philippines, Vietnam, Myanmar, Brunei, Cambodia, and Laos.

  3. 3.

    Rangel and Pillay’s (2007) sample end in January 2007. Though they report significant duration dependence in runs of negative returns, Chan et al. (1998) attributes such duration dependence to chance or other causes such as fads and not due to rational bubbles since rational bubbles cannot be negative.

  4. 4.

    Daily returns would be very noisy making it very difficult to detect bubbles. In fact McQueen and Thorley (1994) suggest the use of monthly rather than weekly returns to test duration dependence since weekly returns contain more noise than the former.

  5. 5.

    Hatipoglu and Uyar (2012) suggest that the bubbles might spill over from the developed markets to the emerging markets.

  6. 6.

    As additional robustness tests we also use real returns, real excess returns, and AR(4) residuals based on real returns with similar results. We do not report them here to save space but are available upon request.

  7. 7.

    Duration dependence test uses non-linear estimates to test the presence of speculative bubbles. Non-linear estimation might provide multiple maxima of the likelihood function. Since we use logit regression, it does not provide more than one maxima (see, Altman et al. 2004).

  8. 8.

    The detailed results are not reported here to save space but are available from the authors upon request.

  9. 9.

    Rangel and Pillay (2007) report a significantly negative beta coefficient of −0.4387 for negative runs. We also calculate a negative beta coefficient of −0.0406 but it is not statistically significantly. The difference in magnitude and significance of our results with theirs could be due to the difference in the indices used.

  10. 10.

    The detailed results are not reported here to save space but are available from the authors upon request.

  11. 11.

    Although negative bubbles cannot exist since security prices are bounded, we also report in Tables 5 and 6, the negative runs for completeness.

  12. 12.

    We also performed the same tests on real monthly returns with similar results. These results are available from the authors upon request.

  13. 13.

    Our results remain robust even when we use a sub-sample from 1988 to 2007, including December 2007. Furthermore, as a robustness test we divide our sample into subsamples based on each suspected bubble episode, and our results remain robust. We saved space by not reporting the detailed results but these are available from the authors upon request.

  14. 14.

    The detailed results are not reported here to save space but are available from the authors upon request.

  15. 15.

    We avoid discussing the findings for negative runs because security prices are bounded and cannot experience negative bubbles. However, we report the negative run results for completeness.

  16. 16.

    We also performed the same tests on real weekly returns with similar results. These results are available from the authors upon request.

  17. 17.

    The detailed results are not reported here to save space but are available from the authors upon request.

  18. 18.

    See Bohl (2003) and Payne and Waters (2007) for recent applications of these techniques.


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Correspondence to Gilbert V. Nartea.

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Nartea, G.V., Cheema, M.A. & Szulczyk, K.R. Searching for rational bubble footprints in the Singaporean and Indonesian stock markets. J Econ Finan 41, 529–552 (2017).

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  • Duration dependence
  • Rational speculative bubbles
  • Singapore
  • Indonesia

JEL classification

  • C41
  • G12