Existence Of Rational Bubbles Research Articles

Speculative Rational Bubbles : Asset Prices in GCC Equity Markets

Conventional theory of speculative bubbles describes stock bubbles as stock prices that exceed their fundamental value because current owners believe that the stocks can be resold at an even higher price in the future. A speculative bubble driven by rumors and not supported by fundamentals will result in mis-allocation of resources into non-optimal uses. Therefore, identifying and dating speculative explosive bubbles has been a major concern in the economic literature. This study examines the presence of the phenomenon of stock market bubbles in the GCC countries including Saudi Arabia, Qatar, United Arab Emirates, Oman and Bahrain over 2000 to 2013. Considering rational bubble change stock price from random walk to an explosive regime and traditional unit roots has less power in detecting periodically collapsing bubbles, this study employ newly developed testing approach of right tailed unit root test to not only investigates the presence of rational periodically collapsing bubbles, but also stamps the times of bubbles emergence and collapse. Our empirical results indicate the existence of rational bubbles in GCC stock market. The estimation of the starting date of the bubbles indicates that explosive regime emerges in the early 2000s.

Are there bubbles in the Sterling-dollar exchange rate? New evidence from sequential ADF tests

There has been mixed evidence regarding the existence of rational bubbles in the foreign exchange markets. This paper introduces recently developed sequential unit root tests into the analysis of exchange rates bubbles. We find strong evidence of explosive behavior in the nominal Sterling-dollar exchange rate. However, this explosive behavior should not be simply interpreted as evidence of rational bubbles, as we show that it might be driven by the relative prices of traded goods.

On Existence, Efficiency and Bubbles of Ramsey Equilibrium with Borrowing Constraints

We address the fundamental issues of existence and efficiency of an equilibrium in a Ramsey model with many agents, where agents have heterogeneous discounting, elastic labor supply and face borrowing constraints.The existence of rational bubbles is also tackled. In the first part, we prove the equilibrium existence in a truncated bounded economy through a fixed-point argument by Gale and Mas-Colell (1975). This equilibrium is also an equilibrium of any unbounded economy with the same fundamentals. The proof of existence is eventually given for an infinite horizon economy as a limit of a sequence of truncated economies. Our general approach is suitable for applications to other models with different market imperfections. In the second part, we show the impossibility of bubbles in a productive economy and we give sufficient conditions for equilibrium efficiency.

Nonlinear short-run adjustments in US stock market returns

Using the considerably powerful nonparametric cointegration tests proposed by Bierens (1997, 2004), we do not find any evidence indicative of the existence of rational bubbles in the US stock market during the long period of 1871 to 2002. In addition, with the application of a logistic smooth transition error-correction model designed to detect the nonlinear short-run adjustments to the long-run equilibrium, we also obtain substantial empirical evidence in favour of the so-called noise trader models where arbitrageurs are reluctant to immediately engage in trading when stock returns deviate insufficiently from their fundamental value.

Present value models with feedback: Solutions, stability, bubbles, and some empirical evidence

On economic grounds we would expect a feedback from the endogenous variable to the forcing variable in many present value models. In this paper we show that feedback can change the dynamical properties of the solution(s) to present value models very substantially. Feedback in a present value model can generate multiple solutions. It can also change the stability of the characteristic roots and introduce an arbitrary martingale in the solution. Furthermore, existence of rational bubbles in present value models with a feedback can be ruled out without invoking the standard transversality condition. The results are applied to the US stock market where we find evidence of a feedback going from lagged stock prices to dividends which gives rise to multiple solutions to the present value stock price.

Testing for rational inflationary bubbles: the case of Argentina, Brazil and Israel

In this paper it is examined whether the existence of rational bubbles can explain the dynamics of the price level during the Argentine, Brazilian and Israeli high inflations in the first half of the 1980s. Based on the Cagan (1956) money demand model, the West (1987) specification test finds evidence of rational inflationary bubbles in the three countries when the money supply is assumed to be exogenous. However, if endogeneity of money is taken into account, there is no evidence of rational bubbles.