Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?

By Peter C. B. Phillips, Yangru Wu, Jun Yu. 2011

1,112 citations recorded by the source corpus.

A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date-stamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a right-side unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. Some asymptotic properties of the Evans (1991) model of periodically collapsing bubbles are analyzed and the paper develops a new model in which bubble duration depends on the strength of the cognitive bias underlying herd behavior in the market. The paper also explores alternative propagating mechanisms for explosive behavior based on economic fundamentals under time varying discount rates. An empirical application to the Nasdaq stock price index in the 1990s provides confirmation of explosiveness and date-stamps the origination of financial exuberance to June 1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in financial markets, thereby giving the remark empirical content.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/272735f4158f169ba8eafbc6ba0699c4b6cf527c

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Citations in the corpus

Tests for explosive financial bubbles in the presence of non-stationary volatility☆ (2016, methodology): “It is important to note that while our paper has focused on testing for the presence of a bubble using the Phillips et al. (2011) test, the subsequent dating procedure proposed by these authors also relies on recursive Dickey-Fuller statistics, the distributions of which will be similarly affected…”
Episodes of Exuberance in Housing Markets: In Search of the Smoking Gun (2016, methodology): “…though the process is inherently explosive (see, e.g., Evans (1991)).16 In order to deal with the e¤ect of a collapse in house prices on the test s performance, Phillips et al. (2011) proposed a recursive procedure based on the estimation of the ADF regression in (20) on subsamples of the data.”
Predictive regression under various degrees of persistence and robust long-horizon regression (2013, background): “Booms and financial exuberance are recurring features in economic activity and these phenomena can be well characterized over subperiods by mildly explosive processes, as described in Phillips et al. (2011) and Phillips and Yu (2011).”
Real time monitoring of asset markets: Bubbles and crises (2018, methodology): “Asset price dynamics over the expansionary phase of a bubble period may be modelled in terms of a mildly explosive process (Phillips and Yu, 2009; Phillips et al., 2011; Phillips and Magdalinos, 2007) of the form”
Did Bubble Activity Intensify During COVID-19? (2020, methodology): “The corresponding t-test statistics are generated following the procedure outlined in Phillips et al. (2011).”
From Hero to Zero: Evidence of Performance Reversal and Speculative Bubbles in German Renewable Energy Stocks (2013, neutral): “…í µí± ] corresponds to the origination date and í µí¼̂ í µí± = �í µí±í µí±̂ í µí± � to the collapse date of explosive price behavior, we compute estimates of these dates as in Phillips et al. (2011): í µí±̂ í µí± = inf í µí± ≥í µí± 0 {í µí± : í µí°´í µí°·í µí°¹ í µí± > í µí±í µí±£(í…”
Index Funds, Financialization, and Commodity Futures Markets (2011, methodology): “He first tests directly for bubbles using a new time-series test developed by Phillips, Wu, and Yu (2009).”
Speculative bubbles in agricultural commodity markets (2013, methodology): “Using a bootstrap method computing the finite sample probability distribution of the tests recently proposed in Phillips and Yu (2009b) and Phillips et al. (2011), we find that there was evidence of explosiveness in the future prices of wheat, corn and rough rice in 2007–2008.”