Rational Bubble Testing: An in-depth Study on CNX Nifty

Abstract

Stock Market bubble, that drives either a few selected stocks, or sometimes even an entire Index far away from the real world of valuation does find its rot in herd behaviour and cognitive bias, as behavioral finance states, however quantification becomes important as public money gets stuck in this financial hurricane more often than not. This study is conducted empirically on CNX Nifty on the onset of 2008 global crisis and concludes recently to detect the indirect evidence of an asset price bubble. Identification of unnatural deviation and asset price movement in a radical manner over a relatively short period of time, without giving adequate time to disperse the information in a symmetric manner becomes quite crucial in investment finance. This study extends Caspi, Itamar's study done in 2013 on behalf of Bank of Israel, on the US markets (namely S&P 500) using three advanced forms of Augmented Dickey Fuller Test (such as RADF, SADF and GSADF simultaneously) and investigates its validity in Indian bellwether bourse CNX Nifty. This study will also throw an interesting aspect of de-coupling myth in Indian capital market along with the spotting of herding behaviour during the global crisis, post the financial cyclone and during the recovery phase extended till recently.