Tests for explosive financial bubbles in the presence of non-stationary volatility

Harvey, David I., Leybourne, Stephen J., Sollis, Robert and Taylor, A.M. Robert (2015) Tests for explosive financial bubbles in the presence of non-stationary volatility. Journal of Empirical Finance, 38 (B). pp. 548-574. ISSN 1879-1727

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This paper studies the impact of permanent volatility shifts in the innovation process on the performance of the test for explosive financial bubbles based on recursive right-tailed Dickey–Fuller-type unit root tests proposed by Phillips, Wu and Yu (2011). We show that, in this situation, their supremum-based test has a non-pivotal limit distribution under the unit root null, and can be quite severely over-sized, thereby giving rise to spurious indications of explosive behaviour. We investigate the performance of a wild bootstrap implementation of their test procedure for this problem, and show it is effective in controlling size, both asymptotically and in finite samples, yet does not sacrifice power relative to an (infeasible) size-adjusted version of their test, even when the shocks are homoskedastic. We also discuss an empirical application involving commodity price time series and find considerably less emphatic evidence for the presence of explosive bubbles in these data when using our proposed wild bootstrap implementation of the Phillips, Wu and Yu (2011) test.

Item Type: Article
RIS ID: https://nottingham-repository.worktribe.com/output/760608
Keywords: Rational bubble; Explosive autoregression; Non-stationary volatility; Right-tailed unit root testing
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: https://doi.org/10.1016/j.jempfin.2015.09.002
Depositing User: Eprints, Support
Date Deposited: 06 Apr 2016 07:34
Last Modified: 04 May 2020 17:16
URI: https://eprints.nottingham.ac.uk/id/eprint/32654

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