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Speculative bubbles in present-value models: A Bayesian Markov-switching state space approach

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  • Chan, Joshua C.C.
  • Santi, Caterina

Abstract

We estimate the dynamics of a speculative bubble subject to a surviving and a collapsing regime together with the dynamics of dividends and returns in a tractable state space specification of the present-value model. To estimate this new high-dimensional model, we develop an efficient Markov chain Monte Carlo sampler to simulate from the joint posterior distribution. We find that real-world stock price bubbles show significant Markov-switching structure. Further, the results indicate that dividend growth rates are highly predictable. Finally, we find that bubble variation explains a large share of the variation in the price-dividend ratio and unexpected return.

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  • Chan, Joshua C.C. & Santi, Caterina, 2021. "Speculative bubbles in present-value models: A Bayesian Markov-switching state space approach," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:dyncon:v:127:y:2021:i:c:s0165188921000361
    DOI: 10.1016/j.jedc.2021.104101
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    More about this item

    Keywords

    Rational bubbles; Present-value model; Markov-switching model; State space model; Bayesian analysis;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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