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Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?

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Author Info
Peter C.B. Phillips () (Cowles Foundation, Yale University)
Yangru Wu (Rutgers Business School - Newarks and New Brunswick, Rutgers University)
Jun Yu (School of Economics, Singapore Management University)

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Abstract

A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date-stamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides confirmation of explosiveness and date-stamps the origination of financial exuberance to mid -1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in financial markets, thereby giving the remark empirical content.

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File URL: http://cowles.econ.yale.edu/P/cd/d16b/d1699.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1699.

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Length: 37 pages
Date of creation: Jun 2009
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Handle: RePEc:cwl:cwldpp:1699

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Related research
Keywords: Explosive root; Irrational exuberance; Mildly explosive process; Nasdaq bubble; Periodically collapsing bubble; Sup test; Unit root test;

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Find related papers by JEL classification:
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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