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Testing For Speculative Bubbles Using Spot And Forward Prices

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  • Efthymios G. Pavlidis
  • Ivan Paya
  • David A. Peel

Abstract

The probabilistic structure of periodically collapsing bubbles creates a gap between future spot and forward (futures) asset prices in small samples. By exploiting this fact, we use a recently developed recursive unit root test and rolling Fama regressions for detecting bubbles. Both methods do not rely on a particular model of asset price determination, are robust to explosive fundamentals, and allow date stamping. An application to U.S. dollar exchange rates provides evidence of bubbles during the interwar German hyperinflation, but not during the recent floating†rate period. A further application to S&P 500 supports the existence of bubbles in the U.S. equity market.

Suggested Citation

  • Efthymios G. Pavlidis & Ivan Paya & David A. Peel, 2017. "Testing For Speculative Bubbles Using Spot And Forward Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(4), pages 1191-1226, November.
    • Handle: RePEc:wly:iecrev:v:58:y:2017:i:4:p:1191-1226
    DOI: 10.1111/iere.12249
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    Citations

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    Cited by:

    1. Cathy Yi-Hsuan Chen & Christian M. Hafner, 2019. "Sentiment-Induced Bubbles in the Cryptocurrency Market," JRFM, MDPI, vol. 12(2), pages 1-12, April.
    2. Yang Hu, 2023. "A review of Phillips‐type right‐tailed unit root bubble detection tests," Journal of Economic Surveys, Wiley Blackwell, vol. 37(1), pages 141-158, February.
    3. Basse, Tobias & Klein, Tony & Vigne, Samuel A. & Wegener, Christoph, 2021. "U.S. stock prices and the dot.com-bubble: Can dividend policy rescue the efficient market hypothesis?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    4. H. Peter Boswijk & Jun Yu & Yang Zu, 2024. "Testing for an Explosive Bubble using High-Frequency Volatility," Working Papers 202402, University of Macau, Faculty of Business Administration.
    5. Kruse, Robinson & Wegener, Christoph, 2020. "Time-varying persistence in real oil prices and its determinant," Energy Economics, Elsevier, vol. 85(C).
    6. Pavlidis, Efthymios G. & Vasilopoulos, Kostas, 2020. "Speculative bubbles in segmented markets: Evidence from Chinese cross-listed stocks," Journal of International Money and Finance, Elsevier, vol. 109(C).
    7. Demetrescu, Matei & Georgiev, Iliyan & Rodrigues, Paulo M.M. & Taylor, A.M. Robert, 2023. "Extensions to IVX methods of inference for return predictability," Journal of Econometrics, Elsevier, vol. 237(2).
    8. Aktham Maghyereh & Hussein Abdoh, 2022. "Can news-based economic sentiment predict bubbles in precious metal markets?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-29, December.
    9. Efthymios G. Pavlidis & Ivan Paya & David A. Peel, 2018. "Using Market Expectations to Test for Speculative Bubbles in the Crude Oil Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(5), pages 833-856, August.
    10. Ayesha Liaqat & Mian Sajid Nazir & Iftikhar Ahmad, 2019. "Identification of multiple stock bubbles in an emerging market: application of GSADF approach," Economic Change and Restructuring, Springer, vol. 52(3), pages 301-326, August.
    11. Figuerola-Ferretti, Isabel & McCrorie, J. Roderick & Paraskevopoulos, Ioannis, 2020. "Mild explosivity in recent crude oil prices," Energy Economics, Elsevier, vol. 87(C).
    12. Nagayasu, Jun, 2021. "Causal and frequency analyses of purchasing power parity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    13. Butt, Muhammad Danial & Ahmed, Mumtaz, 2019. "Testing for Multiple Bubbles in Inflation for Pakistan," MPRA Paper 96847, University Library of Munich, Germany.
    14. Ayesha Liaqat & Mian Sajid Nazir & Iftikhar Ahmad & Hammad Hassan Mirza & Farooq Anwar, 2020. "Do stock price bubbles correlate between China and Pakistan? An inquiry of pre‐ and post‐Chinese investment in Pakistani capital market under China‐Pakistan Economic Corridor regime," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 323-335, July.
    15. Butt, Muhammad Danial & Ahmed, Mumtaz, 2019. "Testing for Multiple Bubbles in Inflation for Pakistan," MPRA Paper 96705, University Library of Munich, Germany.
    16. Skrobotov Anton, 2023. "Testing for explosive bubbles: a review," Dependence Modeling, De Gruyter, vol. 11(1), pages 1-26, January.
    17. Shuping Shi & Peter C. B. Phillips, 2022. "Econometric Analysis of Asset Price Bubbles," Cowles Foundation Discussion Papers 2331, Cowles Foundation for Research in Economics, Yale University.

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