An empirical investigation of asset price bubbles in Latin American emerging financial markets

Abstract

A generally accepted view among researchers and policy makers is that large capital flows to Latin America starting from the second half of the 1980s through the 1990s may have caused speculative bubbles in the asset markets of recipient economies. This article tests for asset price bubbles in the stock markets of six Latin American countries using data for the last 10 years or so. It employs recently developed robust estimation techniques which are specifically designed to exploit the skewness and leptokurtosis that bubbles may engender in the data. It finds massive deviations from normality in both stock prices and dividends series and the test results provide strong evidence for the existence of stock price bubbles in each of the markets examined.