Template-type: ReDIF-Paper 1.0
Author-Name: Tom Engsted
Author-Email: tengsted@creates.au.dk
Author-Workplace-Name: CREATES, School of Economics and Management, Aarhus University, DK-8000 Aarhus C
Author-Name: Bent Nielsen
Author-Email: bent.nielsen@nuffield.ox.ac.uk
Author-Workplace-Name: Nuffield College, Oxford OX1 1NF, U.K.
Title: Testing for rational bubbles in a co-explosive vector autoregression
Abstract:  We derive the parameter restrictions that a standard equity market model implies for a bivariate vector autoregression for stock prices and dividends, and
we show how to test these restrictions using likelihood ratio tests. The restrictions, which imply that stock returns are unpredictable, are derived both for a model without
bubbles and for a model with a rational bubble. In both cases we show how the restrictions can be tested through standard chi-squared inference. The analysis for
the no-bubble case is done within the traditional Johansen model for I(1) variables, while the bubble model is analysed using a co-explosive framework. The methodology
is illustrated using US stock prices and dividends for the period 1872-2000.
Keywords: Rational bubbles, Explosiveness and co-explosiveness, Cointegration, Vector autoregression, Likelihood ratio tests.
X-Classification-JEL: 
Length: 54 pages
Creation-Date: 2010-06-24
Number: 2010-W06
File-URL: http://www.nuffield.ox.ac.uk/economics/papers/2010/w6/bubble24juni10.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1006