Rational bubbles or persistent deviations from market fundamentals?

Tests for fractional integration in the S&P 500 log dividend yield are conducted in order to test the proposition that exogenous shocks have permanent effects. The presence of a unit root in the log dividend yield is consistent with ‘rational bubbles’ in stock prices. Our findings, based on tests for fractional integration, yield robust rejections of the null hypothesis of rational bubbles. The results strongly suggest that the log dividend yield is mean reverting.     

Testing for a rational bubble under long memory

We analyse the time series properties of the S&P500 dividend–price ratio in the light of long-memory, structural breaks and rational bubbles. We find an increase in the long-memory parameter in the early 1990s by applying a test recently proposed by Sibbertsen and Kruse [J. Time Series Anal., 2009, 30, 263–285]. An application of the unit root test against long memory of Demetrescu et al. [Econometr. Theory, 2008, 24, 176–215] suggests that the pre-break data can be characterized by long memory, while the post-break sample contains a unit root. These results reconcile two empirical findings that are seen as contradictory: on the one hand, they confirm the existence of fractional integration in the S&P500 log-dividend–price ratio and, on the other, they are consistent with the existence of a rational bubble. The result of a changing memory parameter in the dividend–price ratio has an important implication for the literature on return predictability: the shift from a stationary dividend–price ratio to a unit root process in 1991 is likely to have caused the well-documented failure of conventional return prediction models since the 1990s.     

Relationship Between Expected Treasury Bill and Eurodollar Interest Rates: A Fractional Cointegration Analysis

In this paper, we extend Booth and Tse's (BT)1995 analysis of fractional cointegration between theexpected Eurodollar and Treasury bill interest ratesimplied by their respective futures contracts. Thedefinition of fractional cointegration suggested byCheung and Lai (1993) and used by BT is refined sothat it requires the cointegrating relationship to bestationary as well as mean-reverting. In addition tothe Geweke and Porter-Hudak method used by BT, a moreefficient Maximum Likelihood (ML) method is used toestimate the cointegrating relationship. The LM (Engle(1982)) test indicates the possible existence of aheteroscedastic cointegrating relationship. Therefore,we use heteroscedastic models (GARCH and ExponentialGARCH) to represent the cointegrating regressioninstead of the simple homoscedastic model used by BT.The empirical evidence cannot reject the nullhypothesis of a stationary fractional cointegrationrelationship between the Eurodollar and Treasury billinterest rates.     

Testing for rational bubbles in the presence of structural breaks: Evidence from nonstationary panels

This paper presents new results on the rational bubbles hypothesis for a panel of 18 OECD countries using the model developed by Campbell (2000). We provide an analysis of international data that exploits increased power deriving from the panel unit root and cointegration methodology, together with the flexibility of allowing explicitly for multiple endogenous structural breaks in the individual series. Differently from the time series methodology, the panel data approach allows for a global analysis of the financial crashes that are related to rational bubbles. We find strong evidence in favor of bubbles phenomena.     

What Drives Housing Markets: Fundamentals or Bubbles?

This study applies the dynamic Gordon growth model which is in the circumstance of rational bubbles to decompose log price-rent ratio into three parts, i.e., rational bubbles, discounted expected future rent growth rates and discounted expected future returns. The latter two terms represent housing fundamentals. The magnitudes of the components of price-rent ratio’s variance are estimated to distinguish the relative impact of the three parts on housing prices. Using time series data from the housing markets in the four largest cities in China (1991:Q1–2011:Q1 for Shanghai, Guangzhou and Shenzhen; 1993:Q2–2011:Q1 for Beijing), this paper presents a number of empirical findings: (a) the variance of rational bubbles is much larger than the variance of price-rent ratio, and rational bubbles contribute more fluctuations directly to price-rent ratio than the expected returns or the expected rent growth rates do; (b) the covariance between rational bubbles and expected returns or expected rent growth rates is also large; (c) the positive covariance of rational bubbles and expected returns implies that high expected returns coexist with bubbles, which differs from previous findings that lower expected returns drive asset prices; (d) the negative covariance of rational bubbles and expected rent growth rates indicates that the larger the bubbles are, the lower the expected rent growth rates are; (e) the positive covariance of expected returns and expected rent growth rates reveals under-reaction of the housing markets to rents.     

Time-varying term premium in T-bill futures rate and the expectations hypothesis

This paper examines time-varying term premium in the T-bill futures rate to determine its significance for the expectations hypothesis (EH). Similar to previous studies on the T-bill forward rates, our data reject the joint hypothesis of the EH and the rational expectations hypothesis (RE). Under the assumption of zero rational expectational error, we find a substantial variation of term premium in the futures rate over time. Furthermore, the lower bound of the expected term premium variance is significantly positive when the rational expectational error is allowed to be nonzero. These findings are inconsistent with the EH. In addition, a relatively high ratio of the lower bound of the expected term premium variance to the prediction error variance implies that the poor predictive power of the futures rate should not be attributed mainly to the market's rational expectational errors.     

Long memory in volatility and trading volume

We use fractionally-integrated time-series models to investigate the joint dynamics of equity trading volume and volatility. Bollerslev and Jubinski (1999) show that volume and volatility have a similar degree of fractional integration, and they argue that this evidence supports a long-run view of the mixture-of-distributions hypothesis. We examine this issue using more precise volatility estimates obtained using high-frequency returns (i.e., realized volatilities). Our results indicate that volume and volatility both display long memory, but we can reject the hypothesis that the two series share a common order of fractional integration for a fifth of the firms in our sample. Moreover, we find a strong correlation between the innovations to volume and volatility, which suggests that trading volume can be used to obtain more precise estimates of daily volatility for cases in which high-frequency returns are unavailable.     

Evidence on the existence of speculative bubbles in farmland prices

We conduct tests for the contribution of speculative bubbles to farmland prices. These tests are carried out under the hypothesis that farmland investors rationally form expectations. The outcome of tests reported here allows us to infer whether farmland prices are determined by market fundamentals-discounted returns from the highest economic land use-or whether rumors about farmland price movements are self-fulfilling. The tests are stationarity and cointegration tests relating farmland prices to rents. The tests are carried out using data from three farm production regions-the Corn Belt, the Northern Plains, and the Lake States. In each region, we find little evidence to reject the hypothesis that market fundamentals determine farmland prices.     

Speculative bubbles in emerging stock markets and macroeconomic factors: A new empirical evidence for Asia and Latin America

The purpose of this study is firstly to test for the existence of periodically collapsing stock price bubbles in Asian and Latin American emerging stock markets for the period 1990–2009. We use the new non-cointegration test developed by Taylor and Peel (1998) with the Residuals-Augmented Least Squares (RALS) method of Im (1996) and Im and Schmidt (2008) for monthly data of price indexes and dividends. The results show that the hypothesis of formation of bubbles cannot be rejected for all of the studied emerging stock markets. This evidence implies that the co-integration relation between the prices and the dividends is not always supported, indicating that the stock prices do not reflect their fundamental values in the emerging stock markets. We then link speculative bubbles with macroeconomic and financial factors, which is an interesting contribution of this study. The degree of equity market openness is found to be the key factor, positively related to the formation of speculative bubbles in these markets.     

Cross-Listings and Home Market Trading Volume: The Case of Malaysia and Singapore

Cross‐listings of equities internationally are becoming more common. Using data for Europe and North America, previous studies reject the order flow diversion hypothesis, which states that international cross‐listings reduce home‐country trading volume. We test this hypothesis using data for equities cross‐listed in Singapore and Malaysia. We find that trading volume in Malaysia fell 42.9% when Singapore markets were closed for holidays. Furthermore, we show that trading volume in Malaysia did not increase following the implementation of regulations that ended the trading of Malaysian equities in Singapore in 1998. Hence, we reject the order flow diversion hypothesis.     

Bubbles,banks and financial stability

The macroeconomic impact of rational bubbles in a limited commitment economy crucially depends on whether banks or ordinary savers hold the bubble. Banks hold the bubble asset when their leverage is high, when long-term real interest rates are low or when lax supervision allows them to enjoy high deposit insurance subsidies. When banks are the bubble-holders, this amplifies the output boom by reducing loan–deposit rate spreads while the bubble survives but also deepens the recession when the bubble bursts. In contrast, the real impact of bubbles held by ordinary savers is more muted.     

A test of the Bolton–Scheinkman–Xiong hypothesis of how speculation affects the vesting time of options granted to directors

This paper investigates empirically the Bolton et al. (2006) hypothesis, according to which initial shareholders may provide incentives to managers to take actions that stimulate speculative bubbles. We test this hypothesis with data on up to 8544 directors and up to 1677 companies between 2004–2008. Using vesting time as a measure of the short-term performance weighting in CEO compensation and various alternative measures of the extent of speculation, the findings support the hypothesis: vesting time decreases with more intensive speculation. The results prove robust in various empirical model specifications.     

Empirical Tests of the Fundamental-Value Hypothesis in Land Markets

The land-price boom of the 1970s followed by the bust of the 1980s generated considerable interest in the determination of land prices and the study of whether those prices reflect fundamental value. In this article, three techniques are used to examine the fundamental-value hypothesis in Iowa and Nebraska agricultural land markets. Duration dependence tests indicate that land markets are not affected by rational expectations bubbles. Conversely, Markov chain and time-reversibility tests suggest that land prices depart from fundamental value due to the existence of nonrandom price changes and asymmetric land price patterns. The results of this research should be viewed as a complement to the existing body of knowledge in our quest to enhance our understanding of agricultural land-price movements.     

Bubble in the Indian stock market: myth or reality

The paper investigates the existence of speculative bubbles in the Indian stock market using both monthly and weekly returns for the period 1990–2007. Further, a year-by-year analysis using weekly returns was also carried out to test for the existence of bubbles in each individual year. The results suggest that no speculative bubbles were present in the Indian stock market for the sample period considered for this study.     

Are There Rational Speculative Bubbles in REITs?

This study tests for the presence of rational speculative bubbles in the Equity REIT industry. We analyze REIT prices using a vector of macroeconomic fundamentals. Using the unit root test and cointegration procedures, we find no evidence of rational bubbles in the REIT market. Tests for duration dependence in the returns series show no evidence of negative duration dependence, suggesting that REIT markets are not affected by rational bubbles. Applying the same tests, we find no evidence of rational speculative bubbles in the Russell 2000 index, a proxy for small-cap stocks.     

A description of farmland investor expectations

We consider how best to characterize agricultural real estate market participants' expectation formation mechanism. The expectation formation mechanism links current agricultural policies to asset prices and tells us how current policies change expectations for future transfers. We examine behavior of real estate prices and returns using the present value model. We derive estimable equations incorporating two rival expectation formation mechanisms: rational and adaptive expectations. Assuming rational expectations, the present value model yields parameter estimates that imply the model should be rejected. Instead of rejecting the present value model while maintaining the rational expectations hypothesis, we let the data reveal which expectations hypothesis best fits the data. When we assume the rival hypothesis, the model yields parameter estimates that conform to adaptive expectations.     

RATIONAL EXPECTATIONS AND THE DYNAMIC ADJUSTMENT OF SECURITY ANALYSTS' FORECASTS TO NEW INFORMATION

We report the results of unbiasedness tests of security analysts' earnings forecasts. By examining how analysts incorporate new information into their updated earnings forecasts we can analyze directly the effect of new information on analysts' forecast revisions and evaluate whether these revised forecasts converge to rational expectations forecasts. The forecasts made by security analysts participating in the Institutional Brokers Estimate System (IBES) database are analyzed. Using standard statistical tests, we reject the simple form of the rational expectations hypothesis. However, by extending the standard tests used in previous studies, we obtain results that suggest that analysts' earnings forecasts conform to a dynamic form of rationality. The tendency of revised forecasts to converge stochastically toward the rational expectations forecast cautions against the rejection of more complicated forms of rationality.     

Fisher Hypothesis Revisited: A Fractional Cointegration Analysis

This paper investigates the validity of the Fisher hypothesis using data from thirtythree developed and developing countries. Conventional cointegration tests do not provide strong evidence for a relation between nominal interest rates and inflation. Therefore, we use fractional cointegration analysis to test the long-run relationship between the two variables. The results indicate that a long-run relation between nominal interest rates and inflation does not appear for most countries in the sample when the conventional cointegration test is employed. However, fractional cointegration between the two variables is found for a large majority of countries, implying the validity of the Fisher hypothesis. The results also indicate that the equilibrium errors display long memory.     

Speculation and price bubbles in the Korean and Japanese real estate markets

This article investigates the possibility of speculation having caused the prices of land and housing to deviate from their given long-run equilibrium levels in Korea and Japan. We modeled speculation by incorporating the expected future price into the demand equation. The existence of growing rational bubbles was tested on Korean and Japanese data using the standard econometric technique for estimating linear rational expectations models. Our analysis of the Korean annual data suggests that a growing rationale bubble existed during the 1974–1989 period, nominal or real. Estimation results of the same model using Japanese annual data also confirmed the existence of a bubble in land price. Contrary to our analysis of land price data, the evidence of the bubble was much less obvious in Korean annual housing price data. We therefore estimated the model using quarterly data and found that the existence of a bubble could not be established in housing prices. This finding was also consistent with the trend of the rent-to-value ratio series in apartment units. Our results need to be taken with caution because our approach suffers from the common econometric problem of possible mis-specification of the model and because of the small size of the sample.     

Are There Rational Bubbles in REITs? New Evidence from a Complex Systems Approach

This study applies a complex systems approach to test for the presence of rational bubbles in the Equity REITs market. The applied model is based on theoretical implications of the evolution of prices under rational bubble regimes. The advantage of the approach is twofold. The model is able to detect rational bubbles while they rise and to predict the most likely time of their collapse. We apply the model to daily price data on U.S. Equity REITs from 1989 to 2011. Our findings suggest the existence of a bubble for the period of 2003 to 2007. Tests for sub-markets reveal that the bubble developed in the Residential REITs market, but not in the Office REITs market.