SPECULATIVE BUBBLE AND ITS EXISTENCE IN STOCK MARKET OF PAKISTAN

Abstract

This empirical study is an attempt to detect speculative bubbles in different indexes of the Pakistan stock market (KSE-100, KSE-30 & KMI-30) using monthly time series data from (2005– 2020) to evaluate all four Rtadf (Recursive, Right tail Augmented Dickey-Fuller) tests. This includes Standard ADF, Rolling-window ADF, Supreme ADF (SADF) and Generalized SADF (GSADF) with Monte-Carlo simulation, under Gaussian assumptions. The findings of this study confirm the two prominent episodes of exuberance and collapse of multiple speculative bubbles in the KSE-100 index while only a single (multiple) bubbles in KSE-30 and KMI-30 indexes using RADF & GSADF tests. The results, in other words, suggest among all four tests, RADF and GSADF are better models to detect the past bubbles in PSX. These results contribute to scarce literature through testing and date stamping bubbles in different indexes of (PSX) with the use of (all) right-tailed tests. For future research, advanced techniques can be employed to predict future bubbles along with their direction.