Explosive Behavior in the 1990s Nasdaq: When did Exuberance Escalate Asset Values?

Abstract

A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date stamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to the Nasdaq stock price index in the 1990s provides confirmation of explosiveness and date stamps the origination of financial exuberance to mid-1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in the financial market, thereby giving the remark empirical content.How do we know when irrational exuberance has unduly escalated asset values? (Alan Greenspan, 1996) Experience can be a powerful teacher. The rise and fall of internet stocks, which created and then destroyed $8 trillion of shareholder wealth, has led a new generation of economists to acknowledge that bubbles can occur.

Bubbles and Crises: The Role of House Prices and Credit

“…The final and main contribution of this paper is to construct country-specific and econometrically based measures of bubble-like behavior, or exuberance, in housing and credit markets. These measures are constructed by recursively testing whether a time series variable is in a regime characterized by explosive behavior or not, see Phillips et al (2011), Phillips et al (2012) and Phillips et al (2013). We establish a positive and highly significant effect of exuberant behavior in any of these markets on the likelihood of a crisis.…”

Detection of multiple bubbles in South African electricity prices

“…A battery of tests was developed by Phillips, Wu and Yu (2011), Yu (2011), Phillips, Shi andYu (2012) and Phillips, Shi and Yu (2013) to identify an exact bubble in a 5 series as well as its origination and collapse dates. To do so, these studies considered an Augmented Dickey and Fuller (1979, ADF) -type regression in a rolling window.…”

Signalling the Dotcom bubble: A multiple changes in persistence approach

“…We also consider the PWY test for a bubble in NASDAQ, using the real monthly Source: Phillips, Wu and Yu (2011) Second, neither method is precise concerning the beginning and end of the bubble.…”

“…Following the same idea of dating regime changes, a different approach to test for bubbles has recently been proposed by Phillips, Wu and Yu (2011), hereafter PWY, later refined by Yu (2013, 2013a). The PWY method is a recursive test procedure which provides a mechanism for testing explosive behaviour, dating the origin and collapse of a bubble and presenting valid confidence intervals for explosive growth rates.…”