Evidence of Bubbles in the Korean Stock Markets

Abstract

Several markov-switching models are used to test for the pres-ence of bubbles in the Korean stock market. Using Korea stock price index (KOSPI) and other macroeconomic variables, an ADF test and cointegration rank test are performed. We found that KOSPI is cointegrated with other macroeconomic variables. The residuals from this cointegrated regression, which should be a stationary process, are tested using a Markov-switching model. We found that there is a regime-switching structure in the resid-uals that appears to be inconsistent with a stationary process. On the basis of these findings we tentatively conclude that this can be evidence of the existence of bubbles in the Korean stock market.

JEL Classification: E3, C2