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Title:In-sample and out-of-sample prediction of stock market bubbles: Cross-sectional evidence PDF Logo
Authors:Herwartz, Helmut
Kholodilin, Konstantin A.
Issue Date:2011
Series/Report no.:Discussion Papers, German Institute for Economic Research, DIW Berlin 1173
Abstract:We evaluate the informational content of ex post and ex ante predictors of periods of excess stock (market) valuation. For a cross section comprising 10 OECD economies and a time span of at most 40 years alternative binary chronologies of price bubble periods are determined. Using these chronologies as dependent processes and a set of macroeconomic and financial variables as explanatory variables, logit regressions are carried out. With model estimates at hand, both in-sample and out-of-sample forecasts are made. Overall, the degree of ex ante predictability is limited if an analyst targets the detection of particular turning points of market valuation. The set of 13 potential predictors is classified in measures of macroeconomic or monetary performance, stock market characteristics, and descriptors of capital valuation. The latter turn out to have strongest in-sample and out-of-sample explanatory content for the emergence of price bubbles. In particular, the price to book ratio is fruitful to improve the ex-ante signalling of stock price bubbles.
Subjects:Stock market bubbles
out-of-sample forecasting
financial ratios
OECD countries
JEL:G01
G17
E27
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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