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Are there periodically collapsing bubbles in the stock markets? New international evidence

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  • Chen, Shyh-Wei
  • Hsu, Chi-Sheng
  • Xie, Zixong

Abstract

A stock price may face a bubble problem for a number of periods, but in the long run the stock price is determined by its market fundamentals. This paper takes this possibility into account and examines whether there are periodically collapsing bubbles in four international stock markets, i.e., the US, Belgium, Denmark and Finland. We test for the presence of periodically collapsing bubbles by examining the nonstationarity of the log dividend yields based on the dividend discount model. Among the main results, it is found that the hypothesis of the rational bubbles cannot be rejected for these stock markets. In addition, the empirical evidence does not favor the hypothesis of the periodically collapsing bubbles provided that nonlinear adjustment and structural break are allowed. The presence of the rational bubbles, but not the periodically collapsing bubbles, is in line with the rational expectations and efficient market hypothesis.

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  • Chen, Shyh-Wei & Hsu, Chi-Sheng & Xie, Zixong, 2016. "Are there periodically collapsing bubbles in the stock markets? New international evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 442-451.
    • Handle: RePEc:eee:ecmode:v:52:y:2016:i:pb:p:442-451
    DOI: 10.1016/j.econmod.2015.09.025
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