Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212210 
Authors: 
Year of Publication: 
2012
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 7/2012
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper provides an early warning indicator for bubbles in financial markets. The indicator is based on traditional unit root tests, more precisely on the augmented Dickey-Fuller test and may be used in a repeated manner with rolling samples. The performance of the indicator is tested extensively via Monte Carlo simulations and comparisons of the results with the most powerful standard (stability) tests. The new indicator seems to be more robust and to have more power than the standard tests. In empirical application to US stock market data for 1871-2010, the new indicator signals most of the consensus bubbles and gives warning signals well ahead of the crash, in most cases as early as 12 months ahead. The indicator also signals most of the 'negative bubbles' before their turning points. The author would like to thank Matti Viren, Esa Jokivuolle, Jouko Vilmunen, Pentti Saikkonen, Heikki Kauppi and Ari Hyytinen for their comments at various stages of this work. I would also like to thank Nina Björklund and Tarja Yrjölä for research assistance.
Subjects: 
asset prices
financial crises
bubble
indicator
unit-root
JEL: 
G12
C15
G01
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-790-0
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.