Supremum Augmented Dickey-Fuller Research Articles

Detecting bubbles in world aluminum prices: Evidence from GSADF test

The aim of this research is to assess the existence of multiple bubbles in the global aluminum market by employing the Generalized Supremum Augmented Dickey-Fuller (GSADF) methodology. This method offers practical time series analysis tools for identifying periods of rapid price escalation, followed by subsequent collapses. Findings indicate the identification of six explosive bubbles occurring between January 1980 and March 2023, during which the aluminum price strayed from its underlying fundamental value. Additionally, this finding is consistent with the asset pricing model, which generally considers both fundamental and bubble components. Based on the empirical results, the aluminum price bubbles are positively influenced by the copper price, GDP, the U. S dollar index, industrialization of China, China’s urbanization rate, whereas the global aluminum production, oil price, and base metal price index have a negative explanatory effect on the aluminum price bubbles. To effectively stabilize the international aluminum price, policymakers are suggested to be vigilant in identifying bubble episodes and monitoring their progression. Additionally, regulatory authorities should implement measures to curb excessive speculative activity during periods of extreme market volatility, thereby mitigating excessive price fluctuations and the formation of aluminum bubbles.

Generalized visible curvature: An indicator for bubble identification and price trend prediction in cryptocurrencies

We propose a novel curvature-based indicator constructed on log-price time series that captures an interplay between trend, acceleration, and volatility found relevant to quantify risks and improve trading strategies. We apply it to diagnose explosive bubble-like behaviors in cryptocurrency price time series and provide early warning signals of impending market shifts or increased volatility. This improves significantly on standard statistical tests such as the Generalized Supremum Augmented Dickey–Fuller (GSADF) and the Backward SADF tests. Furthermore, the incorporation of our curvature-based indicator as a feature into the Light Gradient Boosting Machine enhances its predictive capabilities, as measured by classification accuracy and trading performance.

Price exuberance episodes in private real estate

In this paper, we investigate price exuberance episodes in the main UK commercial real estate sectors – retail, offices and industrials - over the period December 1986–April 2022. Using the Backward Supremum Augmented Dickey Fuller approach of Phillips et al. (2015a,b), we find that episodes of price explosiveness are asynchronous across sectors with only common phase being the period 2003–2007. We also conduct a multivariate probit analysis to identify factors that indicate the occurrence of price exuberance episodes and generate early signals for possible price bubble building. The predictors for price explosiveness differ by sector with more consistent signals obtained from the yield curve for retail and industrials, rent growth for offices and industrials, and inflation for retail and offices. A key implication of this study is that the study of price exuberance and bubbles in private real estate should be sector specific even within the same country.

Dot-com and AI bubbles: Can data from the past be helpful to match the price bubble euphoria phase using dynamic time warping?

The article investigates the existence of a price bubble in the artificial intelligence market, employing the Generalised Supremum Augmented Dickey-Fuller test and dynamic time warping methodology. It proposes a method to detect the end of the price bubble euphoria phase, generating an average profit of close to 7 % over 5 days and over 10.5 % over 20 days, with almost 90 % effectiveness. The study found that the AI market experienced a phase of euphoria due to the COVID-19 pandemic. Four companies – META PLATFORMS, WORKDAY, SALESFORCE and NVIDIA CORPORATION – were identified, whose stock prices currently resemble the euphoria phase.

Effects of adverse geopolitical risk on price bubbles contagion from European natural gas prices to international energy prices

PurposeThe recent Russia–Ukraine conflict highlights the geopolitical importance of natural gas, especially in Europe. In this light, this study examines the impact of the Russia–Ukraine conflict on the spread of price bubbles from European natural gas to international energy prices.Design/methodology/approachThe Generalized Supremum Augmented Dickey-Fuller (GSADF) test is employed to detect the occurrence of price bubble episodes while the Dynamic Logit Model is used to examine price bubble contagion between the two markets. Further, a tri-variate VAR model is used to examine the determinants of the price bubble.FindingsThe findings reveal multiple bubble episodes in both European natural gas and international energy prices. Further, evidence of bilateral contagion between European natural gas and the international energy market is found. In addition, the Russia–Ukraine conflict triggers price bubble episodes in both markets. Finally, a counterfactual analysis suggests that the conflict increases the bubble contagion from the European natural gas market to the international energy market by about 40%. These findings imply that the Russia–Ukraine conflict is a significant driver of high upside risks to bubble occurrence and subsequent contagion to both European natural gas and international energy prices.Originality/valueTo the best of our knowledge, this study contributes new empirical evidence that the Russian–Ukrainian conflict significantly impacts the spread of price bubbles from the European natural gas market to international energy markets.

Unveiling the dynamics: exploring the impact of oil-gas relationships on natural gas bubbles

ABSTRACT Natural gas plays an increasingly important role in the energy landscape, and its price experiences significant volatility and is easily affected by oil due to its substitutability. Therefore, this study investigates the emergence of natural gas bubbles in terms of the relationship between oil prices and natural gas prices (ROPGP) during the sample period from January 1997 to January 2023. Using a theoretical framework covering oil and gas prices that examines price volatility and structural dependencies, this analysis combines subsample rolling window causality tests, Generalized Supremum Augmented Dickey-Fuller (GSADF) bubble detection methods, and logistic regression models. The empirical results indicate that due to Europe’s diversified energy policies, the ROPGP has an adverse effect on the emergence of natural gas price bubbles in Europe. In Japan, however, the ROPGP positively influences natural gas bubbles due to the scarcity of indigenous energy resources and the reliance on natural gas contracts linked to imported oil. Conversely, in the US, the ROPGP does not significantly impact natural gas price bubbles, which is attributed to the country’s self-sufficiency in natural gas production. These findings highlight the differing impacts of the ROPGP on natural gas markets in various regions, shaped by their unique energy structures, policies, and geopolitical factors.

Speculation, climate or pandemic: Who drives the Chinese herbal medicine bubbles?

Reducing excessive price fluctuations of Chinese herbal medicines is crucial to the high-quality development of traditional Chinese medicine. The research utilises the relatively advanced Generalized Supremum Augmented Dickey-Fuller (GSADF) methodology to uncover multiple bubbles in the Chinese herbal medicine market, marking a pioneering effort in identifying cyclical boom and bust periods in this sector. Furthermore, we innovatively establish the logit regression system to identify the key factors contributing to these bubbles, representing a significant contribution to the field. The quantitative analyses reveal the following key insights: First, seven bubbles existed in the Chinese herbal medicine market from January 2007 to September 2023, consistent with the bubble theory that assumes the existence of expectation and intangible components in the price formation of Chinese herbal medicines. Second, it could be found that speculation and climate factors would cause irrational prosperity in the Chinese herbal medicine market, whereas the former's effect is larger and more significant than that of the latter. Third, the periodical boom and bust episodes in this market are undriven by the pandemic factor. Against the backdrop of frequent occurrences of Chinese herbal medicine bubbles, these conclusions would put forward valuable recommendations for China to promote the health and stable development of the Chinese herbal medicine market.

Global uncertainties, geopolitical risks and price exuberance: Evidence from international energy market

AbstractThe interaction of global uncertainty and geopolitical risks with energy price fluctuations has remained a critical global issue. This interaction can impact several regions' macroeconomic performance and welfare by making fundamental energy price forecasting more difficult, which may lead to exuberant behaviour. To help producers, consumers, and regulators make informed decisions in the face of volatile and uncertain energy markets, it is critical to highlight how these uncertainties influence price exuberance. In this light, this study examines the impact of global uncertainty and geopolitical risks on international energy price exuberance using monthly data from January 1990 to October 2022. The study employs supremum augmented Dickey–Fuller (SADF) and generalised augmented Dickey–Fuller (GSADF) tests to identify energy price exuberance. Firstly, consistent with exuberant behaviour, the tests identify seven episodes of explosive behaviour in the international energy prices within the sample. Secondly, this study applies the Logit model to estimate the impact of global uncertainty and geopolitical risks on price exuberance. The estimates suggest that the heightening of global uncertainty may deflate the price exuberance. This study also observes that adverse geopolitical risks (threats and acts) in the world and Ukraine amplify the likelihood of price exuberance in the market. However, adverse geopolitical risk (GPR) in Russia negatively impacted the formation of price exuberance. This finding implies that policymakers can use global uncertainty and geopolitical risks as early warning indicators of probable price exuberance in the international energy market. The findings also indicate the need for a buffer system and safe passage for the flow of energy supply in a geopolitical conflict or a major global event. The study further shows the need for a coordinated effort in innovation, research, and development to enhance energy efficiency and minimise reliance on fossil fuels, which these uncertainties may not significantly influence.

Quantitative Modeling of Financial Contagion: Unraveling Market Dynamics and Bubble Detection Mechanisms

This study explored the complex interplay and potential risk of financial contagion across major financial indices, focusing on the Bucharest Exchange Trading Investment Funds Index (BET-FI), along with global indices like the S&P 500, Nasdaq Composite (IXIC), and Dow Jones Industrial Average (DJIA). Our analysis covered an extensive period from 2012 to 2023, with a particular emphasis on Romania’s financial market. We employed Autoregressive Distributed Lag (ARDL) modeling to examine the interrelations among these indices, treating the BET-FI index as our primary variable. Our research also integrated Exponential Curve Fitting (EXCF) and Generalized Supremum Augmented Dickey–Fuller (GSADF) models to identify and scrutinize potential price bubbles in these indices. We analyzed moments of high volatility and deviations from typical market trends, influenced by diverse factors like government policies, presidential elections, tech sector performance, the COVID-19 pandemic, and geopolitical tensions, specifically the Russia–Ukraine conflict. The ARDL model revealed a stable long-term relationship among the variables, indicating their interconnectedness. Our study also highlights the significance of short-term market shifts leading to long-term equilibrium, as shown in the Error Correction Model (ECM). This suggests the existence of contagion effects, where small, short-term incidents can trigger long-term, domino-like impacts on the financial markets. Furthermore, our variance decomposition examined the evolving contributions of different factors over time, shedding light on their changing interactions and impact. The Cholesky factors demonstrated the interdependence between indices, essential for understanding financial contagion effects. Our research thus uncovered the nuanced dynamics of financial contagion, offering insights into market variations, the effectiveness of our models, and strategies for detecting financial bubbles. This study contributes valuable knowledge to the academic field and offers practical insights for investors in turbulent financial environments.

The study on the effect of restrictive rosewood trade policies on China’s rosewood import prices

PurposeRosewood, as the most internationally traded endangered species, is subject to a series of restrictive trade policies globally. China has historically been the largest importer of rosewood in the world. The fluctuation of China’s rosewood import prices will have a profound impact on the global rosewood trade pattern. This study, therefore, assessed the impact of restrictive trade policies on China’s rosewood import prices to explore the fluctuation rule of rosewood trade prices under restrictive policies.Design/methodology/approachThe study built a partial equilibrium framework about the formation mechanism of rosewood import price bubbles under supply constraints. On this basis, with China’s daily import prices of major rosewood species, the generalized supremum augmented Dickey–Fuller (GSADF) and backward supremum augmented Dickey–Fuller (BSADF) tests were applied to explore the effect of restrictive trade policies on China’s rosewood import prices.FindingsThe empirical analysis revealed that there were multiple price bubbles for five of the seven rosewood species. The largest bubbles were always created before and after the deployment of supply constraints. The empirical results for the counterfactual examples implied that price bubbles would not have occurred if restrictive rosewood trade policies had not been implemented. The above findings indicated that these measures tended to trigger significant price bubbles in China’s rosewood imports.Originality/valueThe effect of restrictive rosewood trade policies on rosewood trade prices had not yet been explored in previous research studies. This study empirically analyzed the effect of restrictive trade policies on China’s rosewood import prices using econometric models.

Explosive Behavior in COVID-19 and Policy Responses: Lessons Learned for Public Health Management

Since the first case of COVID-19 in Turkey, there has been a lingering question as elsewhere in the world: “When will or should the government impose severe restrictions to protect public health?” From a public health perspective, there is value in developing a model to support proactive implementation of social policies. This study aimed to show the benefits of using a novel econometric test (the Generalized Supremum Augmented Dickey-Fuller Test) to detect explosive behavior (bubbles) in Turkey’s daily COVID-19 cases and deaths. Results from the analysis demonstrated a link between identified explosive episodes and critical public health decisions, especially in the case of daily new deaths. They also showed a negative relationship between the formation of exuberant behavior during the pandemic and the vaccination rate. Public health policymakers can incorporate this method into their arsenal to evaluate the overall health situation in combating the pandemic and respond accordingly. Furthermore, among the lessons learned from the Turkish experience is the importance of having a coronavirus scientific advisory board in the decision-making process and the ability to promptly implement policy measures. JEL Codes: C22, C58, I10, I18

The quest for explosive bubbles in the Indonesian Rupiah/US exchange rate: Does the uncertainty trinity matter?

The Generalized Supremum Augmented Dickey-Fuller (GSADF) technique is performed to resolve whether the Indonesian Rupiah/US exchange rate has experienced multiple explosive bubbles. The GSADF uncovers that the Indonesian Rupiah/US exchange rate deviates from the fundamental values by six times from January 1985 to September 2023, periodically indicating the presence of numerous explosive behaviors. Once the full-sample period separates into the managed-floating regime and the free-floating regime, the GSADF still detects multiple bubbles. Of particular curiosity on uncertainty trinity, this study underlines that global geopolitical risk negatively drives explosive actions in the ratio of exchange rates for non-traded and traded goods. The global economic policy uncertainty negatively affects speculative bubbles in the exchange rate and the ratio of exchange rates for non-traded. The country's geopolitical risks negatively strike only speculative bubbles in the exchange rate. Further, we find heterogeneity in our results by examining different exchange rate systems. The robustness checks further firmly ascertain across baseline empirical findings.

Chinese eSports Industry’s Boom and Recession: Evidence From Bubble Detection Framework

This paper aims to explore whether the development of competitive computer gaming (eSports) industries is sustained in China. In doing so, we apply the Generalized Supremum Augmented Dickey-Fuller (GSADF) method to investigate when the bubbles originated and crashed in the Chinese eSports market from 2014 to 2021. Utilizing the data of the Chinese Electronic Sports Thematic Index (CESI), the empirical outcomes show that the Chinese eSports industry may deviate from its market value and that the industry witnesses bubble behaviors. The latent reasons might be attributed to government policies, economic growth, stock market crises, and venture capital investments. Therefore, to promote the stabilized and sustained development of the eSports industry in China, regulators and authorities should pay attention to the evolution of bubbles. Moreover, maintaining policy consistency and continuity may be beneficial in stabilizing investors’ expectations and reducing speculative investment behaviors. JEL Classification: G10, Z23, Z28.

Identifying price bubbles in copper market: Evidence from a GSADF test approach.

This paper uses the test proposed by Generalized Supremum Augmented Dickey-Fuller to identify whether there are multiple bubbles in copper price. The empirical results show that base on market fundamentals, there are seven bubbles existed from January 1980 to March 2023. Through analyses, the first two bubbles can be explained by the demand from Japan by the industry concentration and persistent supply constraint. The third to sixth bubbles are mainly negatively impacted by the global financial crisis and growing demand of China. The last bubble is caused by the economic recovery from Covid-19. The logit regression has stated that aluminum price, copper production, all metals index and GDP have a positive impact on copper bubbles, while China's copper imports and precious metals price negatively explains copper bubbles. The main contributions are the investigation of the copper price bubbles, its determinants and the different technique of GSADF to detect copper price bubbles. Furthermore, it provides helpful information for those investors to make reasonable investment decisions and thus, avoid potential price risk.

Based on GSADF model - To study the impact of surging cross-border capital flows and their internal structure on economic growth

This paper measures surges using the Generalized Supremum Augmented Dickey-Fuller (GSADF) model based on capital flows data for 64 economies from 2003:Q1 to 2020:Q4. Then, this paper examines the impact of surges and the internal structure (abnormal liability flows and abnormal asset flows) on economic growth in the recipient economy, and further investigate the heterogeneity among economies with different levels of economic development. This paper finds that surges can positively contribute to economic growth in the recipient economy. In terms of the internal structure of surges, overall, abnormal liability flows have a significant positive effect on economic growth, while abnormal asset flows have no significant effect. Emerging economies perform in line with the overall, while economic growth in developed economies is positively boosted by both abnormal liability flows and abnormal asset flows together. Our research has important reference value for China to prevent risks of surges and their inherent structural changes.

Testing for financial bubbles in the presence of auto-correlated errors

How to detect financial bubble? In response to this question, a vast amount of empirical research is devoted spanning almost half-century. However, identifying unambiguously the presence of a bubble in the financial time series remains an unsolved problem in standard econometric and financial economic approaches. In this paper, we study the impact of auto-correlated innovations, which is a most common feature of the financial time series, on recently developed unit root tests with varying lag to detect financial bubbles. We apply the more powerful test procedure to identify bubble on the quarterly observations of house price-rent ratios of 4 counties. The results of the study suggest that rolling Max Supremum Augmented Dickey-Fuller (MSADF) test as the best test procedure to detect financial bubbles in the future.

Exploring Bubbles in the Digital Economy: The Case of China

This study identifies the cyclical boom-and-bust episodes in digital economy-related assets and determines whether bubbles exist in China's digital economy. The extant literature mainly focuses on tech or cryptocurrency bubbles and has not considered the digital economy. Therefore, we use data from March 22, 2017, to March 3, 2022, and employ the generalized supremum augmented Dickey–Fuller (GSADF) technique to capture the irrational prosperity in China's digital economy. The conclusion suggests the existence of five bubbles in China's digital economy, all accompanied by extreme fluctuations in related asset prices, which the asset-pricing model supports. Under the backdrop of the scientific and technological revolution and industrial transformation, this exploration offers meaningful suggestions for China to facilitate the sound development of the digital economy.

Are there bubbles in shipping freight during COVID-19?

This study examines the potential bubbles' shipping freight rates during the pandemic through the Generalized Supremum Augmented Dickey-Fuller test. The results explore multiple bubbles in the freight rates during corona disease (COVID-19). Moreover, the result finds that Baltic Dry Index is the most explosive and shows four bubbles, followed by Baltic Clean Tanker Index. The volatile behavior has been more frequent and pronounced since the second quarter of 2021, mainly instigated by the economic recovery. The results detect four bubbles in Baltic Dry Index caused by strong demand for raw materials and uncertainty restrictions. Furthermore, a single bubble in the Baltic Dirty Tanker Index is caused by the increasing oil price, growing demand for floating storage while burst due to new restrictions of the second wave, declining oil prices, and shortages of vessels. The need for oil products, logistical problems and the highest oil prices are the leading determinants of Baltic Clean Tanker index bubbles.

Bubble behaviors in lithium price and the contagion effect: An industry chain perspective

Ensuring the smooth operation of lithium market is crucial for the transition to cleaner sources of energy. From the perspective of boom-bust cycles in the Chinese lithium market, this study explores the existence of periodically bubble behaviors in lithium price utilizing the Generalized Supremum Augmented Dickey-Fuller method. The method delivers an innovative consistent date-stamping assessment for the exuberance and collapse of bubble episodes. We further investigate the interdependence and contagion effects of bubble behaviors in lithium industry chain. The results reveal that multiple bubbles in the Chinese lithium market are confirmed, which are basically accompanied by excess market fluctuations. The finding is consistent with the asset pricing model which implies both expected and invisible components exist in asset prices. The bubble contagion effect from lithium upstream to midstream is demonstrated, while the interdependence effect and bilateral contagion effect are confirmed within the same production stage in lithium industry chain. The findings provide important supporting basis for policymakers to gain a better insight into the dynamics of explosive behaviors in lithium industry chain and to construct preventive policies to maintain stable development of lithium market.

Bubble behaviors in nickel price: What roles do geopolitical risk and speculation play?

The stable operation of nickel market provides essential safeguard for the realization of global sustainable energy transition. In the context of prominent geopolitical risks and financial market instability, the explosive dynamics of nickel market price have not been thoroughly investigated. From a boom-bust cycle perspective, this study examines the existence of periodically bubble behaviors in nickel price utilizing the Generalized Supremum Augmented Dickey-Fuller method. The method delivers an innovative consistent date-stamping assessment for the exuberance and collapse of bubble episodes. This paper further probes into the effects of geopolitical risk, speculations, demand, supply and dollar on bubbles through logistic technique. The results find that four boom-bust cycles in nickel price are detected during 1990–2022, which are basically accompanied by extreme market volatility. This finding is in line with the asset pricing model which implies both expected and invisible components exist in asset price. In terms of macroeconomic determinants, nickel demand positively affects the boom-bust behaviors, while nickel supply and dollar dynamics have a negative impact on bubble occurrence. Particularly, geopolitical risk and speculations are proven to be important drivers in boosting the explosiveness of bubbles. To counter the hazardous economic consequences of bubble collapse, policymakers should formulate precautionary policies in the face of complicated geopolitical landscape and volatile capital market environment.