Tests for explosive financial bubbles in the presence of non-stationary volatility
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 supr...
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| Format: | Article |
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Elsevier
2015
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| Online Access: | https://eprints.nottingham.ac.uk/32654/ |
| _version_ | 1848794459261632512 |
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| author | Harvey, David I. Leybourne, Stephen J. Sollis, Robert Taylor, A.M. Robert |
| author_facet | Harvey, David I. Leybourne, Stephen J. Sollis, Robert Taylor, A.M. Robert |
| author_sort | Harvey, David I. |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | 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. |
| first_indexed | 2025-11-14T19:16:32Z |
| format | Article |
| id | nottingham-32654 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:16:32Z |
| publishDate | 2015 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-326542020-05-04T17:16:25Z https://eprints.nottingham.ac.uk/32654/ Tests for explosive financial bubbles in the presence of non-stationary volatility Harvey, David I. Leybourne, Stephen J. Sollis, Robert Taylor, A.M. Robert 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. Elsevier 2015-09-25 Article PeerReviewed 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 Rational bubble; Explosive autoregression; Non-stationary volatility; Right-tailed unit root testing http://www.sciencedirect.com/science/article/pii/S0927539815000961 doi:10.1016/j.jempfin.2015.09.002 doi:10.1016/j.jempfin.2015.09.002 |
| spellingShingle | Rational bubble; Explosive autoregression; Non-stationary volatility; Right-tailed unit root testing Harvey, David I. Leybourne, Stephen J. Sollis, Robert Taylor, A.M. Robert Tests for explosive financial bubbles in the presence of non-stationary volatility |
| title | Tests for explosive financial bubbles in the presence of non-stationary volatility |
| title_full | Tests for explosive financial bubbles in the presence of non-stationary volatility |
| title_fullStr | Tests for explosive financial bubbles in the presence of non-stationary volatility |
| title_full_unstemmed | Tests for explosive financial bubbles in the presence of non-stationary volatility |
| title_short | Tests for explosive financial bubbles in the presence of non-stationary volatility |
| title_sort | tests for explosive financial bubbles in the presence of non-stationary volatility |
| topic | Rational bubble; Explosive autoregression; Non-stationary volatility; Right-tailed unit root testing |
| url | https://eprints.nottingham.ac.uk/32654/ https://eprints.nottingham.ac.uk/32654/ https://eprints.nottingham.ac.uk/32654/ |