Bayesian Analysis of Bubbles in Asset Prices
We develop a new model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic lo...
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| Format: | Article |
| Language: | English |
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MDPI AG
2017-10-01
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| Series: | Econometrics |
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| Online Access: | https://www.mdpi.com/2225-1146/5/4/47 |
| _version_ | 1828354085461426176 |
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| author | Andras Fulop Jun Yu |
| author_facet | Andras Fulop Jun Yu |
| author_sort | Andras Fulop |
| collection | DOAJ |
| description | We develop a new model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic long run mean. The second regime reflects the bubble period with explosive behavior. Stochastic switches between two regimes and non-constant probabilities of exit from the bubble regime are both allowed. A Bayesian learning approach is employed to jointly estimate the latent states and the model parameters in real time. An important feature of our Bayesian method is that we are able to deal with parameter uncertainty and at the same time, to learn about the states and the parameters sequentially, allowing for real time model analysis. This feature is particularly useful for market surveillance. Analysis using simulated data reveals that our method has good power properties for detecting bubbles. Empirical analysis using price-dividend ratios of S&P500 highlights the advantages of our method. |
| first_indexed | 2024-04-14T02:18:23Z |
| format | Article |
| id | doaj.art-13e6328837704238a72a86fa47bf1cb0 |
| institution | Directory Open Access Journal |
| issn | 2225-1146 |
| language | English |
| last_indexed | 2024-04-14T02:18:23Z |
| publishDate | 2017-10-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Econometrics |
| spelling | doaj.art-13e6328837704238a72a86fa47bf1cb02022-12-22T02:18:07ZengMDPI AGEconometrics2225-11462017-10-01544710.3390/econometrics5040047econometrics5040047Bayesian Analysis of Bubbles in Asset PricesAndras Fulop0Jun Yu1Finance Department, ESSEC Business School, Paris-Singapore, Cergy-Pontoise 95021, CEDEX, FranceSchool of Economics and Lee Kong Chian School of Business, Singapore Management University, 90 Stamford Road, Singapore 178903, SingaporeWe develop a new model where the dynamic structure of the asset price, after the fundamental value is removed, is subject to two different regimes. One regime reflects the normal period where the asset price divided by the dividend is assumed to follow a mean-reverting process around a stochastic long run mean. The second regime reflects the bubble period with explosive behavior. Stochastic switches between two regimes and non-constant probabilities of exit from the bubble regime are both allowed. A Bayesian learning approach is employed to jointly estimate the latent states and the model parameters in real time. An important feature of our Bayesian method is that we are able to deal with parameter uncertainty and at the same time, to learn about the states and the parameters sequentially, allowing for real time model analysis. This feature is particularly useful for market surveillance. Analysis using simulated data reveals that our method has good power properties for detecting bubbles. Empirical analysis using price-dividend ratios of S&P500 highlights the advantages of our method.https://www.mdpi.com/2225-1146/5/4/47parameter learningmarkov switchingMCMCreal time bubble detection |
| spellingShingle | Andras Fulop Jun Yu Bayesian Analysis of Bubbles in Asset Prices Econometrics parameter learning markov switching MCMC real time bubble detection |
| title | Bayesian Analysis of Bubbles in Asset Prices |
| title_full | Bayesian Analysis of Bubbles in Asset Prices |
| title_fullStr | Bayesian Analysis of Bubbles in Asset Prices |
| title_full_unstemmed | Bayesian Analysis of Bubbles in Asset Prices |
| title_short | Bayesian Analysis of Bubbles in Asset Prices |
| title_sort | bayesian analysis of bubbles in asset prices |
| topic | parameter learning markov switching MCMC real time bubble detection |
| url | https://www.mdpi.com/2225-1146/5/4/47 |
| work_keys_str_mv | AT andrasfulop bayesiananalysisofbubblesinassetprices AT junyu bayesiananalysisofbubblesinassetprices |