Tests for an end-of-sample bubble in financial time series

Astill, Sam and Harvey, David I. and Leybourne, Stephen J. and Taylor, Robert (2017) Tests for an end-of-sample bubble in financial time series. Econometric Reviews, 36 (6-9). pp. 651-666. ISSN 1532-4168

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Abstract

In this paper we examine the issue of detecting explosive behaviour in economic and financial time series when an explosive episode is both ongoing at the end of the sample, and of finite length. We propose a testing strategy based on the sub-sampling method of Andrews (2003), in which a suitable test statistic is calculated on a finite number of end-of-sample observations, with a critical value obtained using sub-sample test statistics calculated on the remaining observations. This approach also has the practical advantage that, by virtue of how the critical values are obtained, it can deliver tests which are robust to, among other things, conditional heteroskedasticity and serial correlation in the driving shocks. We also explore modifications of the raw statistics to account for unconditional heteroskedasticity using studentisation and a White-type correction. We evaluate the finite sample size and power properties of our proposed procedures, and find that they offer promising levels of power, suggesting the possibility for earlier detection of end-of-sample bubble episodes compared to existing procedures.

Item Type: Article
Additional Information: “This is an Accepted Manuscript of an article published by Taylor & Francis in Econometric Reviews on 22 March 2017, available online: http://www.tandfonline.com/doi/abs/10.1080/07474938.2017.1307490
Keywords: Rational bubble; Explosive autoregression; Right-tailed unit root testing: Sub-sampling
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: 10.1080/07474938.2017.1307490
Depositing User: Eprints, Support
Date Deposited: 21 Oct 2016 13:50
Last Modified: 07 Aug 2017 09:47
URI: http://eprints.nottingham.ac.uk/id/eprint/37775

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