unit roots and structural change an application to us house price indices this paper employs time series analysis to investigate the price dynamics of the house price indices included in the s p case shiller composite10 index and the validity of the ripple effect following the approach outlined by meen 1999 more specifically the paper first considers the time series properties of the capital gain from the sale of houses that is it examines whether shocks to the capital gain series produce permanent or transitory changes in general the findings lack uniformity and depend upon the assumptions imposed by the testing procedures secondly it considers the time series properties of the ratio of regional house price indices to the composite10 index that is it examines whether shocks to these house price ratios exhibit trend reversion the tests of this ripple effect also display conflicting evidence

internal rent capture and the profit concentration relation if labor is able to capture a portion of the economic rents in profitable industries industry profitability and the relation between market structure and profitability may both be mismeasured this paper estimates a simultaneous equation system in which both the price cost margin and compensation per worker including fringe benefits are endogenous variables the authors sample consists of eighty five well defined producer goods industries they find that labor compensation does include some capture of economic rents further when they correct for this rent capture the relation between market concentration and the price cost margin is strengthened significantly copyright 1991 by mit press

tax policy uncertainty and corporate investment abstract the anticipatory effects of a corporate tax reform of the tax cut cum base broadening variety are analyzed in a dynamic stochastic adjustment model of firm behavior focusing on the case where the firm is uncertain both about the timing and the contents of the expected reform the value of the firm is solved prior to and after the reform the existence of investment spurts prior to the implementation of the tax reform is established rigorous results are derived under constant returns and the effects of diminishing returns are explained the expectation of a future tax cut causes the firm to accelerate optimal investment while the expectation of a reduction in the tax base the rate of fiscal depreciation has the opposite effect for a firm which updates information timing uncertainty interacts with the expectation effect moreover increased timing uncertainty may accelerate or decelerate investment as an optimal response to an expected tax cut futhermore for reasonable assumptions it is shown that a rate cut cum base broadening tax reform of the type implemented in several oecd countries in the 1980s and 1990s cannot be revenue neutral

the walking debt crisis abstract this article sheds light on the question whether arising sovereign credit risk in the emu has been triggered by the us subprime crunch by adapting recent econometric methodologies suggested in the related field of speculative bubbles we find clear evidence for fast diverging and even explosive behavior of emu government bond yields of peripheral countries relative to germany during the financial and the european debt crisis this might be caused by flight to quality effects to german government bonds coincident with the collapse of lehman brothers and by a loss of confidence in the fiscal stability of greece ireland italy portugal and spain during the european debt crisis first we find compelling evidence for bubbles in the dow jones equity real estate investment trusts reits index which serves as a weekly measure of economic activity in the north american real estate sector second in our main analysis we test whether the collapsing bubble in the housing market triggered the diverging government bond yields during two crisis regimes our findings indicate that this was the case in the course of the financial crisis but not during the emu sovereign debt crisis these results suggest that the severe fiscal problems in peripheral countries are homemade rather than imported from the us

detecting periodically collapsing bubbles a markov switching unit root test this paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals as this is essentially a problem of identifying the collapsing periods from the expanding ones we propose using a generalization of the dickey fuller test procedure which makes use of the class of markov regime switching models the potential of the new methodology is illustrated via simulation and an empirical example is given copyright 1999 john wiley sons ltd

rational ponzi games when can a government run a rational ponzi game i e issue debt and never pay back any interest or principal the transversalit y condition of each individual implies that such schemes require an i nfinity of lenders given this horizons are unimportant ponzi games cannot be ruled out by assuming that agents have infinite horizons the authors point out both the basic similarity of and some key diff erences between rational ponzi games and asset price bubbles or fiat money regarding international debt the analysis implies that what matters for the feasibility of rational ponzi games are conditions in the lenders not the borrowers economy copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

comments rational bubbles during poland s hyperinflation implications and empirical evidence by m funke s hall and m sola a number of papers have tested for rational bubbles in the post world war i hyperinflation in germany the present paper henceforth fhs does so in poland around the time of the big bang it finds some evidence that the main determination of the hyperinflation was a rational bubble but cautiously notes that conventional structural models might also explain the hyperinflation i salute their technically sophisticated investigation of this interesting question but in the end find their evidence distinctly less suggestive of bubbles than do they this evidence comes from a nice extension of techniques suggested by diba and grossman 1984 and hamilton and whiteman 1985 and applied to the german hyperinflation by hamilton and whiteman 1985 using the cagan model that paper noted that in the absence of bubbles prices will have the same order of integration as does money if money is say z 2 so that what is stationary is changes in the growth rate of money but not the growth rates themselves then prices should be z 2 as well but bubbles cause explosive growth so no level of differencing will induce stationarity in a variable driven wholly or even in part by a bubble hamilton and whiteman 1985 found that prices and money appeared to be z 2 in the german hyperinflation and concluded that bubbles probably were not present evans 1991 in turn pointed out that if a bubbles periodically grow and collapse and b there are not a whole lot of observations during which the bubble was growing the hamilton and whiteman 1985 test will likely fail to find bubbles and tests are likely to find that prices and money are

are there multiple bubbles in the ethanol gasoline price ratio of brazil this paper tests for the existence of bubbles in the ethanol gasoline price ratio in brazil from 2000 to 2012 using right tailed adf tests results suggest the existence of two bubbles one which has already burst during the re election of president lula and one which has been ongoing since 2010 thus corroborating empirical and anecdotal evidence in the brazilian sugarcane industry freezing gasoline prices not only depressed ethanol prices but also depressed investments in new sugarcane crops and distillation plants

ants rationality and recruitment this paper offers an explanation of behavior that puzzled entomologists and economists ants faced with two identical food sources were observed to concentrate more on one of these but after a period they would turn their attention to the other the same phenomenon has been observed in humans choosing between restaurants after discussing the nature of foraging and recruitment behavior in ants a simple model of stochastic recruitment is suggested this explains the herding and epidemics described in the literature on financial markets as corresponding to the equilibrium distribution of a stochastic process rather than to switching between multiple equilibria

what determines simultaneous asset bubbles an empirical analysis abstractthe recent global financial crisis demonstrated that the simultaneous collapse of asset bubbles in different countries is a major challenge for monetary policy in order to evaluate determinants of these simultaneous asset bubbles we detect rational asset bubbles in corporate equity and real estate markets worldwide using forward recursive right sided adf tests then we create dummy variables for simultaneous asset bubbles and analyse potential determinants using gravity models and spatial economics our empirical analysis suggests that simultaneous asset bubbles depend positively upon potential asset demand capital account openness monetary conditions cultural similarities and negatively upon informational frictions and exchange rate flexibility these findings imply that monetary policy can impede the probability of simultaneous asset bubbles by ensuring sound monetary conditions and choosing a flexible exchange regime

no bubble condition model free tests in housing markets we test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero the most prominent such bubble is the classic rational bubble we study housing markets in the united kingdom and singapore where residential property ownership takes the form of either leaseholds or freeholds leaseholds are finite maturity pre paid and tradeable ownership contracts with maturities often exceeding 700 years freeholds are infinite maturity ownership contracts the price difference between leaseholds with extremely long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry and is thus a direct empirical measure of the transversality condition we estimate this price difference and find no evidence of failures of the transversality condition in housing markets in the u k and singapore even during periods when a sizable bubble was regularly thought to be present

price cost margins in producer goods industries and the importance of being unimportant n this paper i investigate the proposition that the price cost margin of a producer goods industry will vary systematically with what i call the industry s cost importance the importance of its output in the costs of its industrial customers the empirical results indicate that price cost margins are indeed negatively associated with cost importance particularly in highly concentrated industries in these industries at least the evidence seems to confirm the importance of being unimportant in section i i present the relationship between the derived demand elasticity for an industry s output and the cost importance of its output and also analyze the ways in which industry pricing coordination and transaction costs of changing input suppliers interact with cost importance to influence industry price cost margins in sections ii and iii i describe the process of sample selection and a method for calculating a measure of cost importance for producer goods industries in section iv i present the empirical results of estimating the relation between price cost margins and cost importance for a broad sample of producer goods industries and in section v i summarize my findings and suggest some promising avenues for future research

identification of house price bubbles using user cost in a state space model this article studies how much variation in house prices results from nonfundamental factors we propose a relative valuation approach to quantifying a bubble in housing by incorporating the housing user cost into a state space model we find that uk house prices were undervalued from january 1995 to may 2001 and subsequently moved into a bubble over the period to october 2012 our results support the bounded rationality hypothesis in the long run however we also find that the irrational and the rational expectation hypotheses can coexist in the short run when explosive bubbles are driven by price dynamics

on rational bubbles and fat tails this paper addresses the statistical properties of time series driven by rational bubbles a la blanchard and watson 1982 using insights on the behavior of multiplicative stochastic processes we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow power laws exhibit hyperbolic decline more precisely we find that rational bubbles predict a fat power tail for both the bubble component and price differences with an exponent smaller than 1 the distribution of returns is dominated by the same power law over an extended range of large returns although power law tails are a pervasive feature of empirical data these numerical predictions are in disagreement with the usual empirical estimates it therefore appears that exogenous rational bubbles are hardly reconcilable with some of the stylized facts of financial data at a very elementary level

explosive dynamics in house prices an exploration of financial market spillovers in housing markets around the world abstract asset prices in general and real house prices in particular are often characterized by a nonlinear data generating process which may display at times mildly explosive behavior in this paper using the recursive right tailed unit root test methodology proposed by phillips et al 2015a b we find widespread evidence of episodes of explosiveness or exuberance in international real house prices and establish a timeline of such episodes for a panel of 23 countries between first quarter 1975 and fourth quarter 2015 motivated by theory we adopt a dynamic panel logit probit framework to empirically investigate whether macro fundamentals and more specifically financial variables help predict such episodes of exuberance in international real house prices we find that interest rate spreads and real stock market growth together with standard housing fundamentals growth in real personal disposable income per capita and inflation are indeed among the best predictors furthermore we argue that financial developments in other asset markets can play a significant role as a trigger in the emergence of explosiveness in housing markets

exchange rate bubbles fundamental value estimation and rational expectations test abstract we propose a model of periodically collapsing bubbles which extends the van norden 1996 model and nests it by considering a non linear specification for the bubble size in the survival regime and the endogenous determination of the level of the fundamental value of the stochastic process they allow us to test for rationality in the formation of expectations and remove the arbitrariness of exogenously setting the level of the fundamental value this general model is applied to the exchange rate of the brazilian real to the us dollar from march 1999 to february 2011 the futures market exchange rate is used as a proxy of its expected future value and three different structural models are considered for the determination of the fundamental value the first two imply that the exchange rate satisfies either purchasing power parity ppp or a modified version of it the third structural model is a version of the monetary model of exchange rate determination fitted to the period under consideration we obtain the maximum likelihood estimate of the parameters of the models explore the properties of the errors test its restricted versions and compare the three specifications for the fundamental we find that the models we propose fit well the data and are useful in the heuristic interpretation of the exchange rate movements of the period finally we select the structural models that display the best performance according to several criteria

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

the fragility of sunspots and bubbles abstract expectational stability e stability is used to examine the multiplicity of solutions in a range of rational expectations models of interest including muth s inventory model and an overlapping generations model in these model it is found that sunspot and other rational bubble solutions are either e unstable or weakly but not strongly e stable

money demand and exchange rate determination under hyperinflation conceptual issues and evidence from yugoslavia a modified monetary model of exchange rate determination is advanced and tested for the yugoslav hyperinflation of 1992 94 stating that the exchange rate is determined directly in the money market thus implying that private agents due to dollarization denominate their real money holdings in foreign currency empirical evidence supports the advanced model apart from the last seven months of the yugoslav hyperinflation the exact re present value model of the exchange rate is accepted while that of the price level is rejected for the whole period of hyperinflation the modified money demand schedule with money holdings denominated in foreign currency is nonlinear with decreasing semielasticity of money demand

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

when will occur the crude oil bubbles abstract in this paper we apply a recursive unit root test to investigate whether there exist multiple bubbles in crude oil price the method is best suited for a practical implementation of a time series and delivers a consistent date stamping strategy for the origination and termination of multiple bubbles the empirical result indicates that there exist six bubbles during 1986 2016 when the oil price deviate from its intrinsic value based on market fundamentals specifically oil price contains the fundamentals and bubble components the dates of the bubbles correspond to specific events in the politics and financial markets the authorities should actively fight speculative bubbles or just observe their evolutions and speculation activities may decrease which is favour of the stabilisation of the staple commodities including crude oil price these findings have important economic and policy implications to recognise the cause of bubbles and take corresponding measures to reduce the impact on the real economy cause of the fluctuation of crude oil price

speculative bubbles in u k house prices some new evidence in this article we test the view widely held among both academics and practitioners that speculative bubbles have characterized the time series behavior of u k house prices in recent times we motivate our empirical analysis using a stylized overlapping generations model which generates a housing demand function of the form assumed by a large literature illustrating how rational bubbles may arise as a solution to the house price determination equation employing two recently developed econometric techniques specifically designed to test for rational bubbles we then provide empirical evidence for the existence of bubbles in u k house prices over the sample period 1983 2002 a widely held view among academics and practitioners is that the time series behavior of house prices of several major industrialized countries may have been characterized by explosive bubbles which are not present in the underlying fundamentals and which therefore may drive an explosive wedge between house prices and their fundamental determinants in particular with regard to the united kingdom a large empirical literature has studied the determinants of the two booms experienced by house prices in the early 1970s and late 1980s providing some tentative evidence in support of the view that speculation on expected future house prices might have been an important force driving actual house prices see inter alia hendry 1984 muellbauer and murphy 1997 renaud 1997 teraisvirta 1998 more recently concerns of an ongoing house price bubble in the united kingdom have been repeatedly raised by the press and policymakers these concerns are well summarized in the following quote it will be different this time those are the most dangerous words in investment and in economic policy the u k is yet again in an unbalanced expansion behind it lies explosive household

an alternate method of estimating the cagan money demand function in hyperinflation under rational expectations abstract an alternate method of estimating the cagan money demand function under rational expectations is presented the technique utilizes the side assumptions that 1 accurate contemporaneous information on the price level and money stock is available to individuals and 2 unobservable noise in the portfolio balance schedule is neglible the procedure has three main virtues first it is implemented without imposing restrictions on the money supply process second the procedure is extremely simple and economical third it admits a simple test of a restriction implied by the cagan money demand function results are related to issues in recent hyperinflation studies

misspecification versus bubbles in hyperinflation data monte carlo and interwar european evidence abstract this paper analyzes some new tests of the cagan hyperinflation money demand model which have several advantages relative to those in the literature they do not confound specification error with rational bubbles can be implemented with a linear procedure and are frequently able to detect periodically collapsing bubbles which have challenged existing tests after a monte carlo analysis the tests are applied to data from hyperinflations in austria germany hungary and poland evidence of misspecification is found for austria germany and hungary while the model without a rational bubble component appears to fit the data for poland

bubbles in food commodity markets four decades of evidence abstract we use daily prices from individual futures contracts to test whether speculative bubbles exist in 12 agricultural markets and to identify whether patterns of bubble behavior exist over time the samples begin as far back as 1970 and run through 2011 the findings demonstrate that all 12 agricultural markets experienced multiple periods of price explosiveness however bubble episodes represent a very small portion between 1 5 and 2 of price behavior during the 42 year period in addition most bubbles are short lived with 80 90 lasting fewer than 10 days though receiving far less attention negative bubbles contribute significantly to price behavior accounting for more than one third of explosive episodes markets over react during both positive and negative explosive episodes leading to a correction as they return to a random walk this adjustment back to fundamental values is most pronounced with positive bubbles particularly in the earlier part of the sample while the magnitudes of the corrections are generally small there were a few instances of significant increases in prices and large over reactions most notably in the softs e g cocoa 1973 coffee 1994 cotton 2010 we also find that explosive periods did not become more common or last longer in the second half of the sample period and that the most recent bubble episodes may not have been as severe as in mid 1970s

cointegration and cagan s model of hyperinflation under rational expectations when money and prices are integrated of order two philip cagan s 1956 model of hyperinflation will give rise to two different levels of cointegration in most of the literature on the german hyperinflation one of these cointegrating relationships has been ruled out a priori by assuming that velocity shocks follow a random walk using data from the german hyperinflation the author finds this assumption to be unjustified based on a straightforward extension of the cointegrated var approach suggested by john y campbell and robert j shiller 1987 a method to evaluate the cagan model under rational expectations and no bubbles is proposed and implemented to the german data copyright 1993 by ohio state university press

date stamping historical periods of oil price explosivity 1876 2014 article i nfo this paper sets out to date stamp periods of historic oil price explosivity using the generalized sup adf gsadf test procedure developed by phillips shi and yu 2013 the date stamping procedure used in this paper is ef fective at identifying periodically collapsing bubbles a feature found lacking with previous bubble detection methods weset out to identify periods of oilpriceexplosivity relative to the general price leveland oilinventory supplies in the us since 1876 and 1920 respectively the recursive identification algorithms used in this study identify multiple periods of price explosivity and as such provides future researchers with a reference for study ing the macroeconomic impact of historical periods of significant oil price build ups

rational bubbles during poland s hyperinflation implications and empirical evidence abstract it has been argued that the polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only in this paper a range of indirect non structural and structural tests for rational exploding deterministic and stochastic bubbles are carried out we adopt a new strategy based on the work of hall and sola 1993a which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles

the effects of additive outliers on tests for unit roots and cointegration this article discusses the properties of the univariate dickey fuller test and the johansen test for the cointegrating rank when there exist additive outlying observations in the time series we provide analytical as well as numerical evidence that additive outliers may produce spurious stationary hence the dickey fuller test will reject a unit root too frequently and the johansen test will indicate too many cointegrating vectors the results easily generalize to models with temporary change outliers through an empirical example we discuss how additive and temporary change outliers can be detected in practice and we show how dummy variables can be used to remove the influence of such extreme observations

expectations and bubbles in asset pricing experiments abstract we present results on expectation formation in a controlled experimental environment in each period subjects are asked to predict the next price of a risky asset the realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts in most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously these bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or positive feedback expectations of the participants we also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy

multiple bubbles in the european union emission trading scheme abstract the european union emission trading scheme eu ets is the first large scale co 2 emission trading system in the world carbon allowances are financial assets potentially vulnerable to the behavior of traders and investors in fact the carbon price has been quite volatile since the inception of the market and it has recently hit very low values however to date no work exists to evaluate whether volatility and price spikes are due to episodes of speculation and price bubbles our paper fills this gap we use the recent approaches developed by phillips and yu 2010 phillips et al 2011 and phillips et al 2015a 2015b who propose a recursive right sided unit root approaches to detect and date stamp mildly explosive behaviors and carbon market exuberance we complement this methodology by using the wild bootstrap procedure by goncalves and kilian 2004 to control for the heteroschedasticity of carbon price data analyzing the eu ets front month contract price from 2005 to 2014 we find different episodes of price bubbles these episodes are not explained by similar behavior of the fundamentals but seem related to energy and environmental policy announcements our results can provide insightful policy implications in the context of the actual carbon market reform as well as the implementation of stricter financial regulations rules to co 2 trading

investment and technical progress models in which the growth rate is exogenous provide no role for government in determining growth in our model growth is associated with investment through externalities from learning by watching rather than with the level of the capital stock presumption of a technical progress function with first increasing and then decreasing returns leads to multiple steady state growth equilibria there is also an explicit role of government policy in setting tax rates on output it follows that two economies with identical structures and stochastic tax policies may exhibit very different growth paths over sustained periods although the stationary distribution of growth rates is the same given the desirability in principle of subsidizing investment various practical methods are considered copyright 1992 by oxford university press

fads versus fundamentals in farmland prices comment a trivariate vector autoregression time series process based on a present value land price model is used to decompose iowa farmland prices into fundamental and non fundamental components a recent study by falk and lee 1998 found that non fundamental shocks are an important source of volatility in farmland prices and it was interpreted that these price movements were due to fads not speculative bubbles we argue to the contrary and use a regime switching model to provide evidence that supports a partially collapsing bubble story of the dynamics of iowa farmland prices

a closer look at the effect of market growth on industries profits everybody talks about the relation of industries profit rates to their markets rates of growth but nobody does anything about it specifically researchers have confirmed the effect of the growth of nominal output on profits in many multivariate studies without specifying closely the hypothesis under test or the measure of demand growth appropriate to test it a profits growth relationship could stem from several mechanisms the lagged adaptation of capacity to unexpected changes in demand reactions of oligopolists to disturbances in their consensus etc these mechanisms how and where they work hold their own normative interest therefore knowing what behavior and what structure lying behind it accounts for the profits growth relationship should do more than improve the specifications of our studies of allocative efficiency it should also expand our knowledge of adaptive processes that are important and hard to observe directly in this paper we shall synthesize the available explanations of why changes in market demand should affect an industry s profits then present a statistical test of the relative significance of the competing explanations

commercial real estate and equity market bubbles are they contagious to reits this paper uses a regime switching approach to determine whether prices in the us stock direct real estate and indirect real estate markets are driven by the presence of speculative bubbles the results show significant evidence of the existence of periodically partially collapsing speculative bubbles in all three markets a multivariate bubble model is then developed and implemented to evaluate whether the stock and real estate bubbles spill over into reits the underlying stock market bubble is found to be a stronger influence on the securitised real estate market bubble than that of the property market furthermore the findings suggest a transmission of speculative bubbles from the direct real estate to the stock market although this link is not present for the returns themselves

agricultural price transmission across space and commodities during price bubbles this article investigates agricultural price transmission during price bubbles the empirical approach concerns the horizontal transmission of cereal prices both across different market places and across different commodities the trade policy intervention put forward to mitigate the impact of price exuberance is considered the analysis is performed using italian and international weekly spot cash price data over years 2006 2010 a period of generalized turbulence of agricultural markets firstly the properties of price time series are explored then interdependence across prices is specified and estimated by adopting appropriate cointegration techniques results suggest that the bubble had only a slight impact on the price spread and the temporary trade policy measure when effective has limited this impact

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

the theory of rational bubbles in stock prices free disposal of equity which directly rules out the existence of negative rational bubbles in stock pric es also imposes theoretical restrictions on the possible existence o f positive rational bubbles the analysis in this paper shows that a positive rational bubble can start only on the first date of trading of a stock thus the existence of a rational bubble at any date woul d imply that the stock has been overvalued relative to market fundame ntals since the first date of trading and that prior to the first da te of trading the issuer of the stock and potential stockholders who anticipated the initial pricing of the stock expected that the stock would be overvalued copyright 1988 by royal economic society

taxation and the cost of capital the uk experience since the 1960s the uk has witnessed a series of reforms to its corporation tax system these include the creation of corporation tax as an independent tax in 1965 the gradual introduction of generous capital allowances in the early 1970s the introduction of the partial imputation system in 1973 and stock relief in 1975 and the 1984 reforms which reduced the tax rate and capital allowances and abolished stock relief a number of these reforms were designed with the specific intention of influencing company decisions regarding investment and finance through the real cost of capital

trading rules from forecasting the collapse of speculative bubbles for the s p 500 composite index many recent studies documented the presence of speculative bubbles defined as systematic and increasing deviations of actual prices from fundamentals in asset prices however thus far the usefulness of such models has been examined in the literature only from a statistical perspective in this paper we employ two regime switching models of periodically partially collapsing speculative bubbles and examine the risk adjusted profits of trading rules formed using inferences from them use of trading rules derived from an augmented model incorporating market volume leads to higher risk adjusted returns than those obtained employing existing models or a buy and hold strategy

conditional testing for unit root bilinearity in financial time series some theoretical and empirical results abstract this paper introduces a t ratio type test for detecting bilinearity in a stochastic unit root process it appears that such a process is a realistic approximation for many economic and financial time series it is shown that under the null of no bilinearity the test statistics are asymptotically normally distributed proofs of these asymptotic normality results require the gihman and skorohod theory for multivariate diffusion processes finite sample results describe speed of convergence power of the tests and possible distortions to unit root testing which might appear due to the presence of bilinearity it is concluded that the two step testing procedure suggested here the first step for the linear unit root and the second step for its bilinearity is consistent in the sense that the size of the step one test is not affected by the possible detection of bilinearity at step two the empirical part of the paper describes testing unit root bilinearity for 65 garch adjusted stock market indices from mature and emerging markets it is shown that for at least 70 of these markets the hypothesis of no unit root bilinearity has to be rejected

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question

measuring the cost of capital when taxes are changing with foresight abstract the familiar hall jorgenson 1967 cost of capital perturbation is not a uniquely feasible one because of institutional features of actual tax systems the optimal holding time for an incremental unit of capital will generally be infinite the impossibility of an optimal rule for recapturing excess depreciation allowances on disposal is demonstrated when tax changes are foreseen the error in the traditional measure of cost of capital can become highly significant ignorance of this effect led to underestimates of the extent to which the radical changes to the u k corporation tax in 1984 would affect cost of capital and incentives to forestall planned investment

cagan s model of hyperinflation under rational expectations this paper studies p cagan s model of the german hyperinflation under the hypothesis that adaptive expectations are rational it shows that inference about the key money demand elasticity parameter a is very senstitive to the specification of the dynamic interaction of the unobserved money demand shock with prices and money in particular if t j sargent s 1977 specification is modified then his basic conclusions are overturned identification of a does not require prior knowledge about the covariance of unobserved shock terms and d ata on the german hyperinflation imply a sharp not loose estimate of a which is of plausible magnitude finally informal tests indicate that modifying sargent s specification gives rise to improved model fit copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

fundamentals uncertainty bubbles and exchange rate dynamics abstract using a monetary model of exchange rate determination we study exchange rate dynamics with bubbles which depend on stochastic market fundamentals these dynamics can be either stochastically stable or unstable and either monotonic or non monotonic including cyclic in an extreme case they converge with probability one and exhibit cyclic movements implications for the analysis of time dependent regime shifts are also explored exchange rates with bubbles are likely to appear less volatile than the fundamentals in finite samples both the variance bounds and cointegration tests might thus be ineffective in testing the absence of bubbles under fundamentals uncertainty

crypto currency bubbles an application of the phillips shi yu 2013 methodology on mt gox bitcoin prices the creation of bitcoin heralded the arrival of digital or crypto currency and has been regarded as a phenomenon since its introduction it has experienced a meteoric rise in price and rapid growth accompanied by huge volatility swings and also attracted plenty of controversies which even involved law enforcement agencies hence claims abound that bitcoin has been characterized by bubbles ready to burst any time e g the recent collapse of bitcoin s biggest exchange mt gox this has earned plenty of coverage in the media but surprisingly not in the academic literature we therefore fill this knowledge gap we conduct an econometric investigation of the existence of bubbles in the bitcoin market based on a recently developed technique that is robust in detecting bubbles that of phillips et al 2013a over the period 2010 2014 we detected a number of short lived bubbles most importantly we found three huge bubbles in the latter part of the period 2011 2013 lasting from 66 to 106 days with the

misspecification versus bubbles in hyperinflation data comment abstract in this article i critically review some of the claims and analyses made by hooker j int money financ 19 2000 583 in his study of the cagan hyperinflation model i argue that i contrary to what hooker claims cointegration tests can be used to discriminate between bubbles and no bubbles ii contrary to hooker s claim his empirical results for the interwar european hyperinflations do not in general imply that the cagan model is misspecified iii although hooker s analyses build directly on the durlauf and hall bounds on the variances of specification errors in models with expectations nber working paper 2936 massachusetts cambridge 1989 methodology he neglects an important part of that methodology namely the measurement of the magnitude of noise i present such measures and together with reported cointegration tests the noise measures help reinterpreting hooker s empirical results

permanent and transitory effects of fiscal policy on investment in the uk a major change in the british corporate tax system had only a weak effect on the level of manufacturing investment but caused a large and highly significant reduction in its seasonal variance the explanation of this change sheds new light on the impact of pre announced tax changes

moral hazard asset price bubbles capital flows and the east asian crisis the first tests we examine the view that the recent east asian crisis was precipitated by bursting asset price bubbles which had been fuelled by strong capital inflows that were largely the result of a moral hazard problem in financial intermediation and was exacerbated by a vicious cycle of asset price deflation and incipient and actual capital flight we find evidence of stock market bubbles in all east asian economies examined although not in australia we examine various categories of capital flows to these countries and find in particular relatively high reversible components in portfolio flows to east asian economies