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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

5 Issues per year

IMPACT FACTOR 2017: 0.855

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Volume 3, Issue 1


Avoiding the Pitfalls: Can Regime-Switching Tests Reliably Detect Bubbles?

Simon van Norden / Robert Vigfusson
Published Online: 1998-04-01 | DOI: https://doi.org/10.2202/1558-3708.1038

Our paper uses simulation methods to examine the size and power of regime-switching tests for bubbles. We find that even with several hundred observations, the tests show sometimes considerable size distortion. This distortion makes the tests conservative; they understate the significance of the evidence of bubbles. Despite this, the tests display considerable power to detect bubbles even when using the conservative asymptotic critical values. We also find that the frequency with which bubbles collapse has an important influence on the tests' power. An application to monthly Canadian and American stock-price data provides mixed evidence of bubbles.

This article offers supplementary material which is provided at the end of the article.

Keywords: bubbles; regime switching; stock market; crash; multiple equilibria

About the article

Published Online: 1998-04-01

Citation Information: Studies in Nonlinear Dynamics & Econometrics, Volume 3, Issue 1, ISSN (Online) 1558-3708, DOI: https://doi.org/10.2202/1558-3708.1038.

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