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Testing for an Explosive Bubble using High-Frequency Volatility

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  • H. Peter Boswijk
  • Jun Yu
  • Yang Zu

Abstract

Based on a continuous-time stochastic volatility model with a linear drift, we develop a test for explosive behavior in financial asset prices at a low frequency when prices are sampled at a higher frequency. The test exploits the volatility information in the high-frequency data. The method consists of devolatizing log-asset price increments with realized volatility measures and performing a supremum-type recursive Dickey-Fuller test on the devolatized sample. The proposed test has a nuisance-parameter-free asymptotic distribution and is easy to implement. We study the size and power properties of the test in Monte Carlo simulations. A real-time date-stamping strategy based on the devolatized sample is proposed for the origination and conclusion dates of the explosive regime. Conditions under which the real-time date-stamping strategy is consistent are established. The test and the date-stamping strategy are applied to study explosive behavior in cryptocurrency and stock markets.

Suggested Citation

  • H. Peter Boswijk & Jun Yu & Yang Zu, 2024. "Testing for an Explosive Bubble using High-Frequency Volatility," Papers 2405.02087, arXiv.org.
    • Handle: RePEc:arx:papers:2405.02087
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    File URL: http://arxiv.org/pdf/2405.02087
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