Testing for Explosive Bubbles in the Presence of Autocorrelated Innovations
37 Pages Posted: 14 Feb 2017 Last revised: 13 May 2022
Date Written: September 27, 2017
Abstract
We analyze an empirically important issue with recursive right-tailed unit root tests for bubbles
in asset prices. First, we show that serially correlated innovations, which is a feature that
is present in most financial series used to test for bubbles, can lead to severe size distortions
when using either fixed or automatic (based on information criteria) lag-length selection in
the auxiliary regressions underlying the test. Second, we propose a sieve-bootstrap version
of these tests and show that this results in tests which control size well across a number of
simulation designs both with and without highly autocorrelated innovations. We also find
that these improvements in size come at a relatively low cost for the power of the tests. Finally,
we apply the bootstrap tests on the housing market of OECD countries, and generally
find much weaker evidence of housing bubbles compared to existing evidence.
Keywords: Right-tailed unit root tests, GSADF, size and power properties, sieve bootstrap, international housing market
JEL Classification: C58, G12
Suggested Citation: Suggested Citation